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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-27578
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SUNPHARM CORPORATION
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE F593097048
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
THE VERANDA, SUITE 301
814 HIGHWAY A1A
PONTE VEDRA BEACH, FL 32082
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
ISSUER'S TELEPHONE NUMBER: (904) 394-2800
--------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes: [X] No [ ]
Number of shares of the issuer's Common Stock outstanding as of April
26, 1999: 6,914,728
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<PAGE>
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-QSB contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Actual results could differ materially
from those projected in the forward-looking statements as a result of a number
of important factors. For a discussion of important factors that could affect
the results of SunPharm Corporation (the "Company"), please refer to the
discussions herein and to those contained in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998 (the "1998 Form 10-KSB") under the
caption "Item 1. Description of Business - Risk Factors."
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The following unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and notes disclosures, normally included in annual financial
statements prepared in accordance with generally accepted accounting principles,
have been omitted pursuant to these rules and regulations. However, the Company
believes that the disclosures made herein are adequate and, accordingly, that
the information presented is not misleading. These financial statements should
be read in conjunction with the financial statements and notes for the year
ended December 31, 1998, which are included in the 1998 Form 10-KSB.
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<TABLE>
<CAPTION>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(Unaudited)
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
ASSETS
<S> <C> <C>
Current Assets:
Cash ......................................... $ 1,041,893 $ --
Short-term investments ....................... 348,293 1,699,200
Prepaid expenses and other ................... 137,427 162,734
------------ ------------
Total current assets .................... 1,527,613 1,861,934
Receivable from stockholder ....................... 127,235 124,865
Property and equipment, net ....................... 55,293 57,933
Other assets ...................................... 9,275 9,275
------------ ------------
Total assets ........................... $ 1,719,416 $ 2,054,007
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................. $ 306,087 $ 213,627
Accrued liabilities .......................... 140,382 135,580
Notes payable ................................ 73,204 102,706
------------ ------------
Total current liabilities ............... 519,673 451,913
Stockholders' Equity:
Undesignated preferred stock, par value $.001
per share; 2,000,000 shares authorized;
0 shares issued and outstanding ......... -- --
Series A preferred stock, par value $.001 per
share; 300,000 shares authorized; 300,000
shares issued and outstanding ........... 300 300
Series B preferred stock, par value $.001 per
share; 200,000 shares authorized; 66,667
and 0 shares issued and outstanding ..... 67 --
Common stock, par value $.0001 per share;
25,000,000 shares authorized; 6,914,728
and 6,621,395 shares issued and
outstanding ............................. 691 662
Additional paid-in capital ................... 21,438,293 20,871,578
Accumulated deficit during development stage . (20,239,608) (19,270,446)
------------ ------------
Total stockholders' equity .............. 1,199,743 1,602,094
------------ ------------
Total liabilities and
stockholders' equity .................. $ 1,719,416 $ 2,054,007
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<TABLE>
<CAPTION>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(Unaudited)
FROM INCEPTION
(MAY 3, 1990)
THREE MONTHS ENDED MARCH 31, THROUGH
1999 1998 MARCH 31, 1999
------------ ------------ --------------
<S> <C> <C> <C>
REVENUES:
Sponsored research/sublicensing revenue $ -- $ -- $ 3,115,729
Interest income ....................... 18,963 48,939 697,396
------------ ------------ ------------
Total revenues ................... 18,963 48,939 3,813,125
EXPENSES:
Research and development .............. 583,402 549,181 13,079,203
General and administrative ............ 404,723 538,884 10,483,530
Royalty expense ....................... -- -- 490,000
------------ ------------ ------------
Total expenses ................... 988,125 1,088,065 24,052,733
------------ ------------
NET LOSS ................................... $ (969,162) $ (1,039,126) $(20,239,608)
============ ============ ============
NET LOSS PER SHARE ......................... $ (0.15) $ (0.18)
============ ============
SHARES USED IN COMPUTING LOSS PER SHARE .... 6,677,210 5,747,049
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Deficit
Accumulated
Redeemable Convertible Preferred Stock: Additional During
Series A Series B Common Stock: Paid-In Development
Shares Amount Shares Amount Shares Amount Capital Stage
---------------------------------------- --------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 ... 300,000 $ 300 -- -- 6,621,395 $ 662 $ 20,871,578 $(19,270,446)
Issuance of Common Stock ....... -- -- -- -- 293,333 29 300,114 --
Issuance of Preferred Stock .... -- -- 66,667 $ 67 -- -- 266,601 --
Net Loss ....................... -- -- -- -- -- -- -- (969,162)
---------------------------------------- --------------------- ---------------------------
Balance at March 31, 1999 ...... 300,000 $ 300 66,667 $ 67 6,914,728 $ 691 $ 21,438,293 $(20,239,608)
======================================== ===================== ===========================
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(Unaudited)
FROM INCEPTION
(MAY 3, 1990)
THREE MONTHS ENDED MARCH 31, THROUGH
1999 1998 MARCH 31, 1999
------------ ------------ --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ........................................ $ (969,162) $ (1,039,126) $(20,239,608)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............ 2,640 1,962 88,320
Compensation expense related to options,
warrants and stock appreciation rights -- -- 999,016
Amortization of deferred offering costs
incurred in connection with
issuance of Bridge Notes .............. -- -- 775,000
Write-off of patents ..................... -- -- 70,120
(Increase) decrease in receivable
from stockholder ...................... (2,370) 1,316 (127,235)
Decrease (increase) in prepaid expenses
and other assets ...................... 25,307 (3,410) (145,093)
Increase in accounts payable ............. 92,460 31,159 306,087
Increase (decrease) in accrued liabilities 4,802 (22,555) 446,632
------------ ------------ ------------
Total adjustments ..................... 122,839 8,472 2,412,847
------------ ------------ ------------
Net cash used in operating activities .............. (846,323) (1,030,654) (17,826,761)
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of short-term investments ............. -- (3,575,313) (26,488,831)
Sales and maturities of short-term investments .. 1,350,907 4,550,000 26,140,538
Purchases of property and equipment ............. -- (3,984) (79,918)
Payment of patent costs ......................... -- -- (67,424)
------------ ------------ ------------
Net cash provided by (used in) investing activities 1,350,907 970,703 (495,635)
------------ ------------ ------------
FINANCING ACTIVITIES
Repayments of notes payable ..................... (29,502) (65,965) (26,796)
Issuance of Series A preferred stock ............ -- -- 1,673,225
Issuance of Series B preferred stock ............ 266,668 -- 716,668
Issuance of common stock ........................ 300,143 10,590 17,598,540
Stock offering costs ............................ -- -- (597,348)
Proceeds from payable to shareholders ........... -- -- 542,500
Repayment of payable to shareholders ............ -- -- (542,500)
------------ ------------ ------------
Net cash provided by (used in) financing activities 537,309 (55,375) 19,364,289
------------ ------------ ------------
Net change in cash ................................. 1,041,893 (115,326) 1,041,893
Cash at beginning of period ........................ -- 356,969 --
------------ ------------ ------------
Cash at end of period .............................. $ 1,041,893 $ 241,643 $ 1,041,893
============ ============ ============
Supplemental information:
Cash paid for interest .......................... $ 1,552 $ 2,276 $ 169,004
============ ============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The balance sheet at March 31, 1999, the related statements of
operations for the three-month periods ended March 31, 1999 and 1998 and the
period from inception (May 3, 1990) through March 31, 1999, the statement of
stockholders' equity at March 31, 1999, and the statements of cash flows for the
three-month periods ended March 31, 1999 and 1998 and the period from inception
through March 31, 1999 are unaudited. These interim financial statements should
be read in conjunction with the financial statements and related notes included
in the 1998 Form 10-KSB. The unaudited interim financial statements included
herein reflect all adjustments which are, in the opinion of management,
necessary for a fair statement of results for the interim periods presented, and
all such adjustments are of a normal recurring nature. Interim results are not
necessarily indicative of results for a full year.
NET LOSS PER SHARE
Net loss per share is computed based on the weighted-average number of
shares of Common Stock outstanding for the period.
PATENT COSTS
The Company reimburses the University of Florida Research Foundation,
Inc. ("UFRFI") for direct expenses relating to the Company's patents. Patent
costs consist of legal fees and other direct costs incurred in filing,
prosecuting, and maintaining the licensed patents. These costs are charged to
research and development expense when incurred.
RESEARCH AND DEVELOPMENT
Sponsored research payments are recognized as revenue when the research
underlying such payments has been performed. Research and development expenses
are charged to operations when incurred. Research and development expenses
include, among other expenses, consulting fees and cost of reimbursements to
UFRFI.
SEGMENT INFORMATION
The Company is in one business segment and follows the requirements of
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information."
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<PAGE>
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"), effective for fiscal years beginning after June 15, 1999. SFAS No. 133
requires companies to record derivatives on the balance sheet as assets and
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. At this time, the
Company has not determined the effect of this statement on its financial
statement disclosure.
2. SURRENDER OF PURCHASE OPTION
On February 16, 1999, the underwriter of the Company's initial public
offering ("IPO") agreed to surrender a purchase option for 110,000 shares of
Common Stock exercisable at $11.20 per share, which it had acquired in
connection with the IPO and which was due to expire on January 12, 2000. In
exchange for surrender of this option, the Company agreed to issue an equal
number of shares of Common Stock to the underwriter at $0.60 per share, for
total proceeds of $66,000.
3. PRIVATE PLACEMENT OF PREFERRED STOCK AND COMMON STOCK
On March 31, 1999, the Company sold 66,667 shares of Series B
Redeemable Convertible Preferred Stock at $4.00 per share, (the "Series B
Preferred") and 183,333 shares of Common Stock at $1.273 per share to an
institutional investor in a private placement financing (the "Private
Placement") pursuant to Regulation D under the Securities Act. The shares of
Series B Preferred are initially convertible to Common Stock on a 1-for-1 basis,
subject to customary antidilution adjustments. Dividends shall accrue on the
Series B Preferred at the rate of 8% per annum. In the event of liquidation,
dissolution, or winding up of the Company, or, at the option of the holders of
the Series B Preferred, a consolidation or merger of the Company or a sale of
all or substantially all of its assets, holders of the Series B Preferred will
be entitled to receive in preference to the Company's Common Stock an amount per
share equal to the original purchase price plus any accrued dividends per share.
Proceeds from this Private Placement were approximately $485,000, net of legal
fees.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Since its inception in May 1990, the Company has devoted substantially
all of its efforts and resources to research and development conducted on its
own behalf and through collaborations with clinical institutions. The Company's
drug development strategy emphasizes conducting most of its research and
preclinical activities at the University of Florida, with clinical
investigations conducted at various sites, including the University of Florida.
The Company has incurred cumulative net losses of $20,240,000 from its inception
through March 31, 1999. The Company expects to incur additional significant
operating losses for at least the next two years, principally as a result of its
continuing anticipated research and development and clinical trial expenditures.
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<PAGE>
The Company has recently undertaken an assessment of its financial and
operational systems to ensure Year 2000 ("Y2K") compliance. Y2K issues result
from the inability of certain computer programs or computerized equipment to
accurately calculate, store or use a date subsequent to December 31, 1999
because certain computer programs or equipment may interpret the year 2000 as
the year 1900. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business.
Based on its review to date and other preliminary information, the Company does
not anticipate that it will incur any significant costs relating to the
remediation of Y2K issues. The Company believes that the potential impact, if
any, of its systems not being Y2K compliant should not impact the Company's
ability to continue its research and development activities. However, there can
be no assurance at this time that the Company, its research and business
partners, vendors or customers will successfully be able to identify and remedy
all potential Y2K problems or that a system failure resulting from a failure to
identify any such problems would not have a material adverse effect on the
Company.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Interest income decreased to $19,000 for the three months ended March
31, 1999 from $49,000 earned in the same period in 1998. The decrease is
attributable to a lower average cash balance available for investment during the
current quarter.
The Company's research and development expenses totaled $583,000 for
the quarter, an increase of 6% over the $549,000 recorded in the same period in
1998. The higher expenses in the current period were due to increased patent
costs, partially offset by lower clinical expenses. The Company expects its 1999
research and development expenses to be roughly 10% higher than 1998 levels, in
anticipation of initiating clinical trials for four drug candidates during the
current year.
General and administrative expenses were $405,000 for the three months
ended March 31, 1999, as compared to $539,000 for the same period in 1998, a
decrease of 25%. This resulted from a consolidation of investor relations
activity by the Company, combined with a reduction in other administrative
expenses, and also from lower personnel recruiting costs. The Company expects
its general and administrative expenses to increase during 1999, although more
slowly than its research and development expenses.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through collaborative research and sublicense agreements with its strategic
alliance partners and through the issuance of debt and equity securities.
Through March 31, 1999, the Company has received $3,116,000 of cumulative
sponsored research and sublicensing revenues and $21,438,000 in consideration
for the issuance of debt and equity securities, including net proceeds of
approximately $7,200,000 related to its IPO in January 1995.
During the three months ended March 31, 1999, net cash used in
operating activities was $846,000, compared with $1,031,000 for the comparable
period in 1998. The use of less cash in the
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<PAGE>
current period was principally due to a lower net loss as a result of less
expenses, as previously discussed. At March 31, 1999, the Company had cash and
investments totaling $1,390,000, compared with $1,699,000 at December 31, 1998.
The Company's working capital was $l,008,000 at March 31, 1999, compared to
$1,410,000 at December 31, 1998. These decreases are attributable to the
Company's use of cash to fund its operations during the first quarter, partially
offset by the funding provided by a private placement financing as discussed
below.
On February 16, 1999, the underwriter of the Company's IPO agreed to
surrender a purchase option for 110,000 shares of Common Stock exercisable at
$11.20 per share, which it had acquired in connection with the IPO and which was
due to expire on January 12, 2000. In exchange for surrender of this option, the
Company agreed to issue an equal number of shares of Common Stock to the
underwriter at $0.60 per share, for total proceeds of $66,000.
On March 31, 1999, the Company sold 66,667 shares of Series B Preferred
and 183,333 shares of Common Stock at $1.273 per share to an institutional
investor in the Private Placement pursuant to Regulation D under the Securities
Act. The shares of Series B Preferred are initially convertible to Common Stock
on a 1-for-1 basis, subject to customary antidilution adjustments. Dividends
shall accrue on the Series B Preferred at the rate of 8% per annum. In the event
of liquidation, dissolution, or winding up of the Company, or, at the option of
the holders of the Series B Preferred, a consolidation or merger of the Company
or a sale of all or substantially all of its assets, holders of the Series B
Preferred will be entitled to receive in preference to holders of the Company's
Common Stock an amount per share equal to the original purchase price plus any
accrued dividends per share. Proceeds from this Private Placement were
approximately $485,000, net of legal fees.
The Company is in the process of conducting a private placement of up
to 2.5 million shares of Common Stock, as discussed in the Company's Proxy
Statement for its Annual Meeting of Stockholders scheduled for June 8, 1999.
Subscriptions have been received from several investors and are being held in
escrow pending the successful approval of the proposed financing by the
stockholders of the Company at the annual meeting. Due to the number of shares
proposed to be sold and the likelihood of the shares being sold at a discount
from market, the Company has submitted the proposed financing to its
stockholders for approval at the 1999 Annual Meeting. Closing is expected to
occur on the private placement immediately following the meeting.
The Company's future success is affected by a variety of factors,
including progress of the Company's research and development efforts, results of
preclinical studies and clinical trials, the cost and timing of regulatory
approvals, the Company's ability to obtain patent protection for its products on
a cost-effective and timely basis, the rate of technological advances,
determinations as to the commercial potential of the Company's products under
development, the status of competitive products, the establishment of
manufacturing capacity or third-party manufacturing arrangements, its reliance
on research institutions and corporate partners, the uncertainty of health care
reform, and the competitive environment in which the Company operates. The
Company's existing capital resources will not be sufficient to fund the
Company's operations to the point of introduction of a commercially successful
product, if and when that time should arrive. No assurance can be given that
additional capital will be available on acceptable terms, if at all. At the
present time, the Company estimates that its cash balance will be sufficient to
fund operations into the third quarter of 1999.
The Company expects to incur substantial additional research and
development expenses, including expenses associated with preclinical studies,
clinical trials and drug testing. The Company intends to use a portion of its
cash resources, together with funds from its existing collaborative arrangements
with the Warner-Lambert Company ("Warner-Lambert") and Nippon Kayaku Co., Ltd.
("Nippon Kayaku"), for these purposes. The Company's rights to receive payments
from Warner-Lambert and Nippon Kayaku, are dependent upon the achievement of
certain milestones by Warner-Lambert and Nippon Kayaku, respectively, and are
not within the control of the Company. No assurance can be made that such
milestones will be achieved or that such payments will be received by the
Company.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
During the first quarter of 1999, the Company agreed to issue an
aggregate of 110,000 shares of Common Stock at the price of $.60 per share to
the underwriter of the Company's IPO upon the underwriter's surrender of a
purchase option for an equal number of shares of Common Stock. Proceeds of
$66,000 pursuant to this transaction were received by the Company during the
first quarter. The Company also issued 66,667 shares of Series B Preferred at a
price per share of $4.00 and 183,333 shares of Common Stock at a price per share
of $1.273 to an institutional investor in the Private Placement which closed on
March 31, 1999.
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1* Certificate of Designation, Preferences and Rights of
Series B Convertible Preferred Stock
4.1* Securities Purchase Agreement dated March 31, 1999
between the Company and Uni-Invest
11.1* Statement of computation of weighted average shares
outstanding and net loss per share
27.1* Financial Data Schedule
*Filed herewith.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the issuer has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SUNPHARM CORPORATION
Date: May 14, 1999 By: /s/ STEFAN BORG
------------------------------------------------
Stefan Borg
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1999 By: /s/ PAUL M. HERRON
------------------------------------------------
Paul M. Herron
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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CERTIFICATE OF DESIGNATION, PREFERENCES,
AND RIGHTS OF
SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK
OF
SUNPHARM CORPORATION
SUNPHARM CORPORATION, a Delaware corporation (the "Corporation"), does
hereby certify that, pursuant to authority conferred on the Board of Directors
of the Corporation by the Certificate of Incorporation of the Corporation, as
amended, and pursuant to the provisions of Section 151 of Title 8 of the
Delaware Code, the Board of Directors, by a unanimous consent dated March 31,
1999 in lieu of a special meeting, adopted a resolution providing for the
designation, preferences and relative, participating, optional or other rights,
and qualifications, limitations or restrictions thereof, of 200,000 shares of
the Corporation's Preferred Stock, par value $.001 per share, which resolution
is as follows:
RESOLVED: That pursuant to the authority granted to and vested in the
Board of Directors of the Corporation in accordance with the
provisions of the Certificate of Incorporation, as amended, of
the Corporation, the Board hereby designates a series of
Preferred Stock of the Corporation, par value $.001 per share
(the "Preferred Stock"), consisting of 200,000 shares of the
authorized unissued Preferred Stock, as Series B Redeemable
Convertible Preferred Stock (the "Series B Preferred"), and
hereby fixes such designation and number of shares, and the
powers, preferences and relative, participating, optional or
other rights, and the qualifications, limitations and
restrictions thereof as set forth below, and that the officers
of the Corporation, and each acting singly, are hereby
authorized, empowered and directed to file with the Secretary
of State of the State of Delaware a Certificate of
Designation, Preferences and Rights of the Series B Redeemable
Convertible Preferred Stock, as such officer or officers shall
deem necessary or advisable to carry out the purposes of this
Resolution.
SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK. The preferences,
privileges and restrictions granted to or imposed upon the Corporation's Series
B Redeemable Convertible Preferred Stock, par value $.001 per share, or the
holders thereof, are as follows:
1. LIQUIDATION RIGHTS.
(a) TREATMENT AT LIQUIDATION, DISSOLUTION OR WINDING UP.
(i) Except as otherwise provided in Section 1(b) below, in the
event of any liquidation, dissolution or winding up of the affairs
(each event, a "Liquidation Event") of
<PAGE>
the Corporation, whether voluntary or involuntary, the holders of
Series B Preferred shall be entitled to be paid first out of the assets
of the Corporation available for distribution to holders of the
Corporation's capital stock of all classes, before payment or
distribution of any of such assets to the holders of any other class or
series of the Corporation's capital stock designated to be junior to
the Series B Preferred, an amount equal to the original purchase price
of $4.00 per share of Series B Preferred (which amount shall be subject
to equitable adjustment whenever there shall occur a stock dividend,
distribution, combination of shares, reclassification or other similar
event with respect to Series B Preferred and, as so adjusted from time
to time, is hereinafter referred to as the "Base Liquidation Price")
plus all dividends accrued or declared but unpaid, to and including the
date full payment shall be tendered to the holders of Series B
Preferred with respect to such Liquidation Event.
(ii) Following payment in full to the holders of Series B
Preferred of all amounts distributable to them under Section 1(a)(i)
hereof, the remaining assets of the Corporation available for
distribution to holders of the Corporation's capital stock shall be
distributed on a pro rata basis among the holders of the Series B
Preferred on an as converted basis and the holders of the Common Stock.
(iii) If the assets of the Corporation shall be insufficient
to permit the payment in full to the holders of Series B Preferred of
all amounts distributable to them under Section 1(a)(i) hereof, then
the entire assets of the Corporation available for such distribution
shall be distributed ratably among the holders of Series B Preferred.
(b) TREATMENT OF REORGANIZATIONS, CONSOLIDATIONS, MERGERS AND
SALES OF ASSETS. Except as otherwise provided in Subsection 2(d)(vii) hereof, a
Reorganization (as defined in Subsection 2(d)(vii) hereof) shall be regarded as
a Liquidation Event of the Corporation within the meaning of this Section 1,
provided, however, that the holders of at least a majority of the outstanding
shares of the Series B Preferred upon the occurrence of a Reorganization shall
have the option to elect the benefits of Subsection 2(d)(vii) hereof for the
Series B Preferred in lieu of receiving payment in a Liquidation Event of the
Corporation pursuant to this Section 1. The provisions of this Subsection 1(b)
shall not apply to any reorganization, merger or consolidation involving (1)
only a change in the state of incorporation of the Corporation, (2) a merger of
the Corporation with or into a wholly-owned subsidiary of the Corporation which
is incorporated in the United States of America, or (3) an acquisition by
merger, reorganization or consolidation, in which the Corporation is
substantively the surviving corporation and operates as a going concern, of
another corporation which is incorporated in the United States of America and
which is engaged in a business similar to or related to the business of the
Corporation and which does not involve a change in the terms of the Series B
Preferred or of the Common Stock.
(c) DISTRIBUTIONS OTHER THAN CASH. The amount deemed distributed
to the holders of Series B Preferred upon any Liquidation Event (including any
Reorganization treated as a Liquidation Event pursuant to Section 1(b)) shall be
the cash or the fair market value of the property, rights, or securities
distributed to such holders by the acquiring person, firm, or other entity. The
value of such property, rights, or other securities shall be determined in good
faith by the Board of Directors of the Corporation; provided, however, that in
the event that the amounts
2
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paid pursuant to Section 1(b) consist of securities of an acquiring corporation,
(i) any shares received that have been registered under the Securities Act of
1933, as amended (the "Securities Act"), shall be valued at the average closing
price per share for such securities on the 10 days ending on the fifth day prior
to the consummation of the Reorganization (the "Closing Price"), (ii) any
securities of a class that is registered under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the offer and sale of which shares have
not been registered under the Securities Act shall be valued at 80% of the
Closing Price and (iii) securities of a class that has not been registered under
the Exchange Act shall be valued based on a valuation mutually acceptable to the
Board of Directors of the Corporation and holders of at least a majority of the
Series B Preferred.
2. CONVERSION. The holders of Series B Preferred shall have
conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT; CONVERSION PRICE. Each share of Series B
Preferred shall be convertible, without the payment of any additional
consideration by the holder thereof and at the option of the holder thereof, at
any time after the date of issuance of such share, at the office of the
Corporation or any transfer agent for the Series B Preferred, into such number
of fully paid and non-assessable shares of Common Stock as is determined by
dividing $2.00 by the Conversion Price, determined as hereinafter provided, in
effect at the time of conversion. The Conversion Price for purposes of
calculating the number of shares of Common Stock deliverable upon conversion
without the payment of any additional consideration by the holder of Series B
Preferred (the "Conversion Price") shall initially be $2.00. Such initial
Conversion Price shall be subject to adjustment, in order to adjust the number
of shares of Common Stock into which Series B Preferred is convertible, as
hereinafter provided.
(b) MECHANICS OF CONVERSION. Before any holder of Series B
Preferred shall be entitled to convert the same into full shares of Common
Stock, such holder shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or of any transfer agent for the
Series B Preferred, and shall give written notice to the Corporation at such
office that such holder elects to convert the same and shall state therein the
name of such holder or the name or names of the nominees of such holder in which
such holder wishes the certificate or certificates for shares of Common Stock to
be issued. No fractional shares of Common Stock shall be issued upon conversion
of any shares of Series B Preferred. In lieu of any fractional shares of Common
Stock to which the holder would otherwise be entitled, the Corporation shall pay
cash equal to such fraction multiplied by the then effective Conversion Price.
The Corporation shall, as soon as practicable thereafter, issue and deliver at
such office to such holder of Series B Preferred, or to such holder's nominee or
nominees, a certificate or certificates for the number of shares of Common Stock
to which such holder shall be entitled as aforesaid, together with cash in lieu
of any fraction of a share. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of Series B Preferred to be converted, and the person or persons entitled
to receive the shares of Common Stock issuable upon conversion shall be treated
for all purposes as the record holder or holders of such shares of Common Stock
on such date.
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(c) [intentionally omitted]
(d) ADJUSTMENTS TO CONVERSION PRICE FOR DILUTING ISSUES.
(i) SPECIAL DEFINITIONS. For purposes of this Section
2(d), the following definitions shall apply:
(A) "OPTION" shall mean rights, options or warrants
to subscribe for, purchase or otherwise acquire Common Stock
or Convertible Securities.
(B) "ORIGINAL ISSUE DATE" shall mean the date on
which shares of Series B Preferred were first issued.
(C) "CONVERTIBLE SECURITIES" shall mean any evidences
of indebtedness, shares (other than Common Stock and Series B
Preferred) or other securities directly or indirectly
convertible into or exchangeable for Common Stock.
(D) "ADDITIONAL SHARES OF COMMON STOCK" shall mean
all shares of Common Stock issued (or, pursuant to Section
2(d)(iii), deemed to be issued) by the Corporation after the
Original Issue Date, other than the following (collectively,
"EXCLUDED SHARES"):
(I) shares of Common Stock issued or
issuable upon the conversion of Series B Preferred;
(II) shares of Common Stock issued or
issuable as a dividend on the Series B Preferred:
(III) by reason of a dividend, stock split
or other distribution on shares of Common Stock;
(IV) Options to purchase shares of Common
Stock issued or issuable to officers, employees or
directors of, or consultants to, the Corporation
pursuant to the Corporation's Amended and Restated
1994 Stock Option Plan, the Corporation's Amended and
Restated 1995 Nonemployee Directors' Stock Option
Plan or any stock option plan of the Corporation
adopted by the Board of Directors of the Corporation
and approved by the stockholders of the Corporation
after the Original Issue Date;
(V) shares of Common Stock issued or
issuable upon the exercise of Options outstanding on
the Original Issue Date or upon the exercise of the
Options referred to in the foregoing clause (IV).
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(ii) NO ADJUSTMENT OF CONVERSION PRICE. No adjustment in
the number of shares of Common Stock into which a share of Series B
Preferred is convertible shall be made by adjustment in the Conversion
Price in respect of the issuance of Additional Shares of Common Stock
or otherwise unless (i) the consideration per share for an Additional
Share of Common Stock issued or deemed to be issued by the Corporation
is less than the Conversion Price in effect on the date of, and
immediately prior to, the issue of such Additional Shares of Common
Stock and (ii), prior to such issuance, the Corporation fails to
receive written notice from the holders of at least a majority of the
then outstanding shares of Series B Preferred agreeing that no such
adjustment shall be made as the result of the issuance of Additional
Shares of Common Stock.
(iii) ISSUE OF SECURITIES DEEMED ISSUE OF ADDITIONAL SHARES
OF COMMON STOCK.
(A) OPTIONS AND CONVERTIBLE SECURITIES. In
the event the Corporation at any time after the Original Issue
Date shall issue any Options or Convertible Securities or
shall fix a record date for the determination of holders of
any class of securities entitled to receive any such Options
or Convertible Securities, then the maximum number of shares
(as set forth in the instrument relating thereto without
regard to any provisions contained therein for a subsequent
adjustment of such number) of Common Stock (other than
Excluded Shares) issuable upon the exercise of such Options
or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Common
Stock issued as of the time of such issue or, in case such a
record date shall have been fixed, as of the close of business
on such record date, provided that Additional Shares of Common
Stock shall not be deemed to have been issued unless the
consideration per share (determined pursuant to Section
2(d)(v) hereof) of such Additional Shares of Common Stock
would be less than the Conversion Price in effect on the date
of and immediately prior to such issue, or such record date,
as the case may be, and provided further that in any such case
in which Additional Shares of Common Stock are deemed to be
issued:
(I) No further adjustment in the Conversion
Price shall be made upon the subsequent issue of
Convertible Securities or shares of Common Stock upon
the exercise of such Options or conversion or
exchange of such Convertible Securities;
(II) If such Options or Convertible
Securities by their terms provide, with the passage
of time or otherwise, for any increase in the
consideration payable to the Corporation, or decrease
in the number of shares of Common Stock issuable upon
the exercise, conversion or exchange thereof, the
Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with
respect thereto), and any subsequent adjustments
based thereon, shall, upon any such increase or
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decrease becoming effective, be recomputed to reflect
such increase or decrease insofar as it affects such
Options or the rights of conversion or exchange under
such Convertible Securities;
(III) Upon the expiration of any such
options or any rights of conversion or exchange under
such Convertible Securities which shall not have been
exercised, the Conversion Price computed upon the
original issue thereof (or upon the occurrence of a
record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon such
expiration, be recomputed as if:
(a) In the case of Convertible
Securities or Options for Common Stock the
only Additional Shares of Common Stock
issued were the shares of Common Stock, if
any, actually issued upon the exercise of
such Options or the conversion or exchange
of such Convertible Securities and the
consideration received therefor was the
consideration actually received by the
Corporation for the issue of all such
Options, whether or not exercised, plus the
consideration actually received by the
Corporation upon such exercise, or for the
issue of all such Convertible Securities
which were actually converted or exchanged,
plus the additional consideration, if any,
actually received by the Corporation upon
such conversion or exchange; and
(b) In the case of Options for
Convertible Securities only the Convertible
Securities, if any, actually issued upon the
exercise thereof were issued at the time of
issue of such Options, and the consideration
received by the Corporation for the
Additional Shares of Common Stock deemed to
have been then issued was the consideration
actually received by the Corporation for the
issue of all such Options, whether or not
exercised, plus the consideration deemed to
have been received by the Corporation
(determined pursuant to Section 2(d)(v))
upon the issue of the Convertible Securities
with respect to which such Options were
actually exercised;
(IV) No readjustment pursuant to clause (II)
or (III) above shall have the effect of increasing
the Conversion Price to an amount which exceeds the
lower of (a) the Conversion Price on the original
adjustment date, or (b) the Conversion Price that
would have resulted from any issuance of Additional
Shares of Common Stock between the original
adjustment date and such readjustment date;
(V) In the case of any Options which expire
by their terms not more than 30 days after the date
of issue thereof, no adjustment of the Conversion
Price shall be made until the expiration or exercise
of all such
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Options, whereupon such adjustment shall be made in
the same manner provided in clause (III) above; and
(VI) If such record date shall have been
fixed and such Options or Convertible Securities are
not issued on the date fixed therefor, the adjustment
previously made in the Conversion Price which became
effective on such record date shall be canceled as of
the close of business on such record date, and
thereafter the Conversion Price shall be adjusted
pursuant to this Section 2(d)(iii) as of the actual
date of their issuance.
(B) STOCK DIVIDENDS, STOCK DISTRIBUTIONS AND
SUBDIVISIONS. In the event the Corporation at any time or from
time to time after the Original Issue Date shall declare or
pay any dividend or make any other distribution on the Common
Stock payable in Common Stock or effect a subdivision of the
outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in Common Stock), then
and in any such event, Additional Shares of Common Stock shall
be deemed to have been issued:
(I) In the case of any such dividend or
distribution, immediately after the close of business
on the record date for the determination of holders
of any class of securities entitled to receive such
dividend or distribution, or
(II) In the case of any such subdivision, at
the close of business on the date immediately prior
to the date upon which corporate action becomes
effective.
If such record date shall have been fixed and no part
of such dividend shall have been paid on the date fixed
therefor, the adjustment previously made for the Conversion
Price which became effective on such record date shall be
canceled as of the close of business on such record date, and
thereafter the Conversion Price shall be adjusted pursuant to
this Section 2(d)(iii) as to the time of actual payment of
such dividend.
(iv) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF
ADDITIONAL SHARES OF COMMON STOCK.
(A) In the event the Corporation shall issue
Additional Shares of Common Stock (including, without
limitation, Additional Shares of Common Stock deemed to be
issued pursuant to Section 2(d)(iii) but excluding Additional
Shares of Common Stock deemed to be issued pursuant to Section
2(d)(iii)(B), which event is dealt with in Section 2(d)(vi)
hereof), without consideration or for a consideration per
share less than the applicable Conversion Price in effect on
the date of and immediately prior to such issue, then and in
such event, such Conversion Price shall be reduced,
concurrently with such issue, to a price (calculated to the
nearest cent) determined by multiplying such Conversion Price
by a fraction, the numerator of
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which shall be (I) the number of shares of Common Stock
outstanding immediately prior to such issue plus (II) the
number of shares of Common Stock which the aggregate
consideration received or deemed to have been received by the
corporation for the total number of Additional Shares of
Common Stock so issued would purchase at such Conversion
Price, and the denominator of which shall be (I) the number of
shares of Common Stock outstanding immediately prior to such
issue plus (II) the number of Additional Shares of Common
Stock so issued or deemed to be issued.
(B) For the purposes of Section 2(d)(iv)(A) hereof,
(i) all shares of Common Stock issuable upon conversion of
shares of Series B Preferred and upon exercise of Options or
conversion or exchange of Convertible Securities outstanding
immediately prior to any issue of Additional Shares of Common
Stock, or any event with respect to which Additional Shares of
Common Stock shall be deemed to be issued, shall be deemed to
be outstanding and (ii) immediately after any Additional
Shares of Common Stock are deemed issued pursuant to Section
2(d)(iii), such Additional Shares of Common Stock shall be
deemed to be outstanding.
(C) Notwithstanding anything to the contrary
contained herein, the applicable Conversion Price in effect at
the time Additional Shares of Common Stock are issued or
deemed to be issued shall not be reduced pursuant to Section
2(d)(iv)(A) hereof at such time if the amount of such
reduction would be an amount less than $0.01, but any such
amount shall be carried forward and reduction with respect
thereto made at the time of and together with any subsequent
reduction which, together with such amount and any other
amount or amounts so carried forward, shall aggregate $0.01 or
more.
(v) DETERMINATION OF CONSIDERATION. For purposes of this
Section 2(d), the consideration received by the Corporation for the
issue of any Additional Shares of Common Stock shall be computed as
follows:
(A) CASH AND PROPERTY. Such consideration shall:
(I) Insofar as it consists of cash, be
computed at the aggregate amounts of cash received by
the Corporation excluding amounts paid or payable for
accrued interest or accrued dividends at the time of
such issue;
(II) Insofar as it consists of property
other than cash, be computed at the fair market value
thereof at the time of such issue, as determined in
good faith by the Board of Directors; and
(III) In the event that Additional Shares of
Common Stock are issued together with other shares or
securities or other assets of the
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Corporation for consideration which covers both, be
the proportion of such consideration so received,
computed as provided in clauses (I) and (II) above,
as determined in good faith by the Board of
Directors.
(B) OPTIONS AND CONVERTIBLE SECURITIES. The
consideration per share received by the Corporation for
Additional Shares of Common Stock deemed to have been issued
pursuant to Section 2(d)(iii)(A), relating to Options and
Convertible Securities, shall be determined by dividing (I)
the total amount, if any, received or receivable by the
Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments
relating thereto, without regard to any provision contained
therein for a subsequent adjustment of such consideration)
payable to the Corporation upon the exercise of such Options
or the conversion or exchange of such Convertible Securities,
or in the case of Options for Convertible Securities, the
exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities, by (II)
the maximum number of shares of Common Stock (as set forth in
the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of
such number) issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities.
(vi) ADJUSTMENT FOR DIVIDENDS, DISTRIBUTIONS,
SUBDIVISIONS, COMBINATIONS OR CONSOLIDATIONS OF COMMON STOCK.
(A) STOCK DIVIDENDS, DISTRIBUTIONS OR SUBDIVISIONS.
In the event the Corporation shall issue Additional Shares of
Common Stock pursuant to Section 2(d)(iii)(B) in a stock
dividend, stock distribution or subdivision, the Conversion
Price in effect immediately prior to such stock dividend,
stock distribution or subdivision shall, concurrently with the
effectiveness of such stock dividend, stock distribution or
subdivision, be proportionately decreased.
(B) COMBINATIONS OR CONSOLIDATIONS. In the event the
outstanding shares of Common Stock shall be combined or
consolidated, by reclassification or otherwise, into a lesser
number of shares of Common Stock, the Conversion Price in
effect immediately prior to such combination or consolidation
shall, concurrently with the effectiveness of such combination
or consolidation, be proportionately increased.
(vii) CAPITAL REORGANIZATION, MERGER OR SALE OF ASSETS. If at
any time or from time to time there shall be a capital reorganization
of the Common Stock (other than a subdivision, combination,
recapitalization, reclassification or exchange of shares provided for
elsewhere in this Section 2) or a consolidation or merger of the
Corporation, or a sale of all or substantially all of the assets of the
Corporation, other than a merger, consolidation or sale of all or
substantially all of the assets of the Corporation in a transaction in
which the shareholders of the Corporation immediately prior to the
transaction possess more than 50%
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<PAGE>
of the voting securities of the surviving entity (or parent, if any)
immediately after the transaction (a "Reorganization"), then, as a part
of and as a condition to such Reorganization, provision shall be made
so that the holders of shares of the Series B Preferred shall
thereafter be entitled to receive upon conversion of the shares of the
Series B Preferred the same kind and amount of stock or other
securities or property (including cash) of the Corporation, or of the
successor corporation resulting from such Reorganization, to which such
holder would have been entitled if such holder had converted its shares
of the Series B Preferred immediately prior to the effective time of
such Reorganization. In any such case, appropriate adjustment shall be
made in the application of the provisions of this Section 2 to the end
that the provisions of this Section 2 (including adjustment of the
Conversion Price then in effect and the number of shares of Common
Stock or other securities issuable upon conversion of the shares of the
Series B Preferred) shall be applicable after such Reorganization in as
nearly equivalent manner as may be reasonably practicable.
In the case of a transaction to which both this Subsection
2(d)(vii) and Subsection 1(b) hereof apply, the holders of at least a
majority of the outstanding shares of the Series B Preferred upon the
occurrence of a Reorganization shall have the option to elect treatment
either under this Subsection 2(d)(vii) or under Subsection 1(b) hereof,
notice of which election shall be given in writing to the Corporation
not less than five (5) business days prior to the effective date of
such Reorganization. If no such election is timely made, the provisions
of Subsection 1(b) and not of this Subsection 2(d)(vii) shall apply.
The provisions of this Subsection 2(d)(vii) shall not apply to
any reorganization, merger or consolidation involving (1) only a change
in the state of incorporation of the Corporation, (2) a merger of the
Corporation with or into a wholly-owned subsidiary of the Corporation
which is incorporated in the United States of America, or (3) an
acquisition by merger, reorganization or consolidation, in which the
Corporation is substantively the surviving corporation and operates as
a going concern, of another corporation which is incorporated in the
United States of America and which is engaged in a business similar to
or related to the business of the Corporation and which does not
involve a change in the terms of the Series B Preferred or of the
Common Stock.
(e) NO IMPAIRMENT. The Corporation shall not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation but shall at
all times in good faith assist in the carrying out of all the provisions of this
Section 2 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of Series B
Preferred against impairment.
(f) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Section 2,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each affected
holder of Series B Preferred, a certificate setting forth such adjustment or
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readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any affected holder of Series B Preferred furnished to such holder a
like certificate setting forth (i) such adjustments and readjustments, (ii) the
Conversion Price at the time in effect, and (iii) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon conversion of each share of Series B Preferred.
(g) NOTICES OF RECORD DATE. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend which is the same as cash dividends paid in
previous quarters) or other distribution, the Corporation shall mail to each
holder of Series B Preferred at least ten (10) days prior to such record date a
notice specifying the date on which any such record is to be taken for the
purpose of such dividend or distribution.
(h) COMMON STOCK RESERVED. The Corporation shall reserve and keep
available out of its authorized but unissued Common Stock such number of shares
of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series B Preferred.
(i) CERTAIN TAXES. The Corporation shall pay any issue or transfer
taxes payable in connection with the conversion of any shares of Series B
Preferred, provided, however, that the Corporation shall not be required to pay
any tax which may be payable in respect of any transfer to a name other than
that of the holder of such Series B Preferred.
(j) CLOSING OF BOOKS. The corporation shall at no time close its
transfer books against the transfer of any Series B Preferred, or of any shares
of Common Stock issued or issuable upon the conversion of any shares of Series B
Preferred in any manner which interferes with the timely conversion or transfer
of such Series B Preferred.
3. VOTING RIGHTS.
(a) Except as otherwise required by law or this Certificate of
Incorporation the holders of Series B Preferred and the holders of Common Stock
shall be entitled to notice of any stockholders' meeting and to vote as a single
class upon any matter submitted to the stockholders for a vote, on the following
basis:
(i) Holders of Common Stock shall have one vote per share
of Common Stock held by them; and
(ii) Holders of Series B Preferred shall have that number
of votes per share of Series B Preferred as is equal to the number of
shares of Common Stock into which each such share of Series B Preferred
held by such holder could be converted on the date for determination of
stockholders entitled to vote at the meeting.
(b) ELECTION OF DIRECTORS. In addition to voting as a single class
with the holders of the Common Stock for the election of directors, so long as
there shall be outstanding at least 100,000
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shares of Series B Preferred (adjusted for any stock splits, dividend or similar
events affecting the Series B Preferred after the date of this Certificate), a
majority of the holders of the Series B Preferred voting separately from the
holders of Common Stock shall at all times be entitled to elect one member of
the Board of Directors.
4. DIVIDEND RIGHTS.
(a) From and after the Original Issue Date, dividends shall accrue
on each share of the Series B Preferred, whether or not funds are legally
available therefor and whether or not declared by the Board of Directors, at the
rate per annum equal to $0.32 per share of Series B Preferred (the "Series B
Dividends"). From time to time the Board of Directors of the Corporation may
declare and pay dividends or distributions on shares of the Common Stock,
provided that no such dividend or other distribution may be declared or paid on
the Common Stock (other than a dividend payable entirely in shares of the Common
Stock of the Corporation) unless (1) all accrued Series B Dividends shall have
been paid in full prior to the date of any such declaration, payment or
distribution and (2) no shares of Series B Preferred remain outstanding on the
date of any such declaration, payment or distribution.
(b) If, with the consent of the holders of at least a majority of
the outstanding Series B Preferred, the Board of Directors of the Corporation
shall declare a dividend payable upon the then outstanding shares of the Common
Stock (other than a dividend payable entirely in shares of the Common Stock of
the Corporation), then the Board of Directors shall declare at the same time a
dividend upon the then outstanding shares of the Series B Preferred payable at
the same time as the dividend paid on the Common Stock, in an amount equal to
the amount of dividends per share of Series B Preferred as would have been
payable on the largest number of whole shares of Common Stock which each share
of Series B Preferred held by each holder thereof would have received if such
Series B Preferred had been converted to Common Stock pursuant to the provisions
of Section 2 hereof as of the record date for the determination of holders of
Common Stock entitled to receive such dividends.
(c) In the event the Board of Directors of the Corporation shall
declare a dividend payable upon any class or series of capital stock of the
corporation other than Common Stock, the Board of Directors shall declare at the
same time a dividend upon the then outstanding shares of Series B Preferred,
payable at the same time as such dividend on such other class or series of
capital stock in an amount equal to (i) in the case of any series or class
convertible into Common Stock, that dividend per share of Series B Preferred as
would equal the dividend payable on such other class or series determined as if
all such shares of such class or series had been converted to Common Stock and
all shares of Series B Preferred have been converted to Common Stock on the
record date for the determination of holders entitled to receive such dividend
or (ii) if such class or series of capital stock is not convertible into Common
Stock, at a rate per share of Series B Preferred determined by dividing the
amount of the dividend payable on each share of such class or series of capital
stock by the original issuance price of such class or series of capital stock
and multiplying such fraction by the Base Liquidation Price then in effect.
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(d) Notwithstanding the foregoing provisions of this Section 4:
(i) upon any conversion of the Series B Preferred pursuant to Section 2 above,
all accrued and unpaid dividends on such shares of Series B Preferred to and
until the date of such conversion shall be forfeited and shall not be due and
payable; and (ii) the payment of all or any portion of accrued and unpaid
dividends on Series B Preferred may be waived by the affirmative vote of holders
of not less than a majority in interest of the Series B Preferred, voting as a
separate class.
5. COVENANTS.
The Corporation shall not, without first having obtained the
affirmative vote or written consent of the holders of not less than two-thirds
in voting power of the outstanding shares of Series B Preferred:
(i) Amend, alter or repeal any provision of, or add any
provision to, the Corporation's Certificate of Incorporation or
By-Laws;
(ii) Alter or change the preferences, rights, privileges
or powers of, or the restrictions provided for the benefit of, the
Series B Preferred;
(iii) Increase the authorized number of shares of the
Series B Preferred or any other series of capital stock of the
Corporation;
(iv) Reclassify any shares of any class or series of the
capital stock of the Corporation into shares having any preference or
priority superior to or on a parity with any such preference or
priority of the Series B Preferred;
(v) Create, authorize or issue any other class or series
of capital stock or any security convertible into or evidencing the
right to purchase shares of any class or series of capital stock of the
Corporation having any preference or priority superior to or on a
parity with any such preference or priority of the Series B Preferred;
or
(vi) Effect (A) any Liquidation Event of the Corporation
or any of its subsidiaries, (B) any sale, lease, assignment, transfer
or other conveyance (other than the grant of a mortgage or security
interest in connection with indebtedness for borrowed money) of all or
substantially all the assets of the Corporation, or (C) any
consolidation or merger of the Corporation with or into any other
entity.
6. NO REISSUANCE OF SERIES B PREFERRED. No share or shares of
Series B Preferred acquired by the Corporation by reason of redemption,
purchase, conversion or otherwise shall be reissued, and all such shares shall
be canceled, retired and eliminated from the shares which the corporation shall
be authorized to issue.
7. REDEMPTION.
(a) At the written request in the form of notice to the
Corporation (the
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"Redemption Notice") of the holder or holders of at least a majority of the
shares of Series B Preferred then outstanding made at any time after March 31,
2001 , the Corporation shall redeem on the Redemption Date (as such term is
defined below), at a redemption price per share equal to the greater of the
original Conversion Price, being $2.00 per share, or the Conversion Price as
adjusted at the Redemption Date for such Series B Preferred, plus an amount
equal to any accrued or declared but unpaid dividends thereon (the "Redemption
Price"), all of the outstanding Series B Preferred. The Redemption Price may be
payable, at the Corporation's option, in cash or a number of shares of Common
Stock, as determined pursuant to Section 7(d) below.
(b) On and after the Redemption Date, all rights of all
holders with respect to those shares of Series B Preferred being redeemed by the
Corporation pursuant to Section 7(a), except the right to receive the Redemption
Price per share of Series B Preferred as hereinafter provided, shall cease and
terminate, and such shares of Series B Preferred shall no longer be deemed to be
outstanding, whether or not the certificates representing such shares have been
received by the Corporation; PROVIDED, HOWEVER, that, notwithstanding anything
to the contrary set forth herein, if the Corporation defaults in the payment of
the Redemption Price in respect of any share of Series B Preferred, then the
rights of the holder or holders with respect to such shares of Series B
Preferred shall continue until the Corporation cures such default.
(c) On the twentieth (20th) business day following the
date upon which the Corporation received the Redemption Notice (the "Redemption
Date") from a majority of holders of Series B Preferred the Corporation shall
pay each holder of Series B Preferred the applicable Redemption Price pursuant
to the terms of Section 7(a), provided that the Corporation or its transfer
agent has received the certificate(s) representing the shares of Series B
Preferred to be redeemed.
(d) The Redemption Price shall be payable, at the
Corporation's option, in cash or in shares of Common Stock, or any combination
thereof; PROVIDED that if the Corporation elects to pay the aggregate Redemption
Price in cash and shares of Common Stock, the cash portion shall be allocated
pro rata to all holders of Series B Preferred. In the event that the Corporation
elects to pay all or any portion of the Redemption Price in shares of Common
Stock, such shares of Common Stock shall be valued at the lowest of (i) the
Market Price Per Share (as defined below) of the Common Stock on March 31, 1999,
(ii) the Market Price Per Share of the Common Stock on the original issue date
of the Series B Preferred and (iii) the Market Price Per Share of the Common
Stock on the date which is two business days prior to the Redemption Date. The
"Market Price Per Share" of the Common Stock on any date shall mean the average
of the daily closing prices per share of Common Stock for the 20 consecutive
Trading Days immediately prior to such date; PROVIDED that in the event that the
current market price per share of Common Stock is determined during a period
following the announcement by the Corporation of (A) a dividend or distribution
on the Common Stock payable in shares of Common Stock or securities convertible
into shares of Common Stock or (B) any subdivision, combination or
reclassification of the Common Stock and prior to the expiration of 20 Trading
Days after the ex-dividend date for such dividend or distribution, or the record
date for such subdivision, combination or reclassification, then, and in each
such
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case, the Current Market Price Per Share shall be appropriately adjusted to
reflect ex-dividend trading or such subdivision, combination or
reclassification. The closing price for each day shall be (i) if the Common
Stock is then quoted on the Nasdaq National Market, the Nasdaq SmallCap Market
or another primary national securities exchange, the closing bid price of the
Common Stock as reported by the Nasdaq National Market, the Nasdaq SmallCap
Market or such primary national securities exchange (as the case may be), (ii)
if the Common Stock is not then traded on the Nasdaq National Market, the Nasdaq
SmallCap Market nor on a national securities exchange, the closing bid price in
the over-the-counter market as reported by the National Association of
Securities Dealers' Automated Quotation System or, if not so reported, the price
as reported by the National Quotation Bureau, Inc., or any organization
performing a similar function or (iii) if no such prices are then furnished, the
fair market value of a share of Common Stock as mutually determined by the Board
of Directors of the Corporation and holders of at least a majority of the Series
B Preferred.
8. RESIDUAL RIGHTS. All rights accruing to the outstanding shares
of the Corporation not expressly provided for in the terms of the Series B
Preferred shall be vested in the Common Stock.
The holders of the Series B Preferred shall vote as a separate class
with respect to any matter or proposed action as to which applicable law or this
Certificate of Incorporation require the vote, consent, or approval of the
holders of the Series B Preferred.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be signed by its duly authorized officer this 31st day of March,
1999.
SUNPHARM CORPORATION
By: /s/ STEFAN BORG
---------------------------------
Name: Stefan Borg
Title: President
- --------------------------------------------------------------------------------
SECURITIES PURCHASE AGREEMENT
- --------------------------------------------------------------------------------
SUNPHARM CORPORATION
200,000 shares of Series B Redeemable Convertible Preferred Stock
and
550,000 shares of Common Stock
issued in exchange for
an aggregate of
$1,500,000 and up to 366,667 Warrants to purchase Common Stock
- --------------------------------------------------------------------------------
Dated as of March 31, 1999
- --------------------------------------------------------------------------------
<PAGE>
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of this
31st day of March, 1999, by and among SunPharm Corporation, a Delaware
corporation (the "Company"), and the Persons listed on SCHEDULE A attached
hereto (individually, a "Purchaser" and, collectively, the "Purchasers").
WHEREAS, certain of the Purchasers entered into a Unit Purchase
Agreement with the Company dated March 28, 1997 (the "Unit Purchase Agreement"),
pursuant to which the Purchasers purchased units, each unit consisting of one
share of the Company's Common Stock (as defined below) and one Warrant (as
defined below) to purchase one share of the Company's Common Stock;
WHEREAS, the Company desires to issue and sell to the Purchasers, and
the Purchasers desire to acquire on the terms and subject to the conditions set
forth herein, up to an aggregate of 200,000 shares of Series B Redeemable
Convertible Preferred Stock, par value $.001 per share (the "Series B Preferred
Stock"), and up to an aggregate of 550,000 shares of Common Stock;
NOW, therefore, in consideration of the premises and the mutual
covenants contained in this Agreement, the parties agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01 DEFINITIONS. As used in this Agreement, references to
either gender shall include the other gender, and the following terms shall have
the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
"Affiliate" shall have the meaning given to such term in Rule
12b-2 of the Rules and Regulations under the Exchange Act.
"Agreement" means this Securities Purchase Agreement, as
amended, modified or supplemented from time to time.
"Business Day" means any day on which commercial banks are not
authorized or required by law to close in New York, New York.
"Commission" means the United States Securities and Exchange
Commission, or any other agency successor thereto.
<PAGE>
"Common Shares" means shares of Common Stock.
"Conversion Shares" means those shares of Common Stock
issuable upon the conversion of the Series B Preferred Stock.
"Common Stock" shall mean the Common Stock, par value $.0001
per share, of the Company, and shall include any stock into which such
Common Stock shall have been changed or any stock resulting from any
reclassification of such Common Stock and all other stock of any class
or classes (however designated) of the Company the holders of which
have the right, without limitation as to amount, either to all or to a
share of the balance of current dividends and liquidating dividends
after the payment of dividends and distributions on any shares entitled
to preference.
"Company" means and shall include SunPharm Corporation, a
Delaware corporation, and its successors and permitted assigns.
"Exchange Act" means the Securities Exchange Act of 1934 or
any successor Federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Guarantee" shall mean any obligation, contingent or
otherwise, of any Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person in any manner,
whether directly or indirectly, and including, without limitation, any
obligation of such Person, direct or indirect, (i) to purchase or pay
(or advance or supply funds for the purchase or payment of) such
Indebtedness or to purchase (or to advance or supply funds for the
purchase of) any security for the payment of such Indebtedness, (ii) to
purchase property, securities or services for the purpose of assuring
the owner of such Indebtedness of the payment of such Indebtedness, or
(iii) to maintain working capital, equity capital or other financial
statement condition of the primary obligor so as to enable the primary
obligor to pay such Indebtedness; provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit,
in either case, in the ordinary course of business.
"Indebtedness" shall mean, with respect to any Person, (i) all
obligations of such Person for borrowed money, or with respect to
deposits or advances of any kind (other than deposits, advances or
excess payments accepted in connection with the sale by such Person of
products or services in the ordinary course of business), (ii) all
obligations of such Person evidenced by bonds, debentures, notes or
similar instruments, (iii) all obligations of such Person upon which
interest charges are customarily paid (other than obligations accepted
in connection with the purchase by such Person of products or services
in the ordinary course of business), (iv) all obligations of such
Person under conditional sale or other title retention agreements
relating to property purchased by such Person, (v) all obligations of
such Person issued or assumed as the deferred purchase price of
property or services (other than accounts payable to suppliers incurred
in the ordinary course of business and paid when due), (vi) all
Indebtedness of others secured
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by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien or security
interest on property owned or acquired by such Person whether or not
the obligations secured thereby have been assumed, (vii) all
obligations of such Person under leases required to be accounted for as
capital leases under generally accepted accounting principles, and
(viii) all Guarantees of such Person.
"Lien" shall mean: (i) any interest in property (whether real,
personal or mixed and whether tangible or intangible) which secures an
obligation owed to, or a claim by, a Person other than the owner of
such property, whether such interest is based on the common law,
statute or contract, including, without limitation, any such interest
arising from a lease, mortgage, charge, pledge, security agreement,
conditional sale, trust receipt or deposit in trust, or arising from a
consignment of bailment given for security purposes (other than a trust
receipt or deposit given in the ordinary course of business which does
not secure any obligation for borrowed money), (ii) any encumbrance
upon such property which does not secure such an obligation, and (iii)
any exception to or defect in the title to or ownership interest in
such property, including, without limitation, reservations, rights of
entry, possibilities of reverter, encroachments, easements, rights of
way, restrictive covenants, licenses and PROFITS A PRENDRE. For
purposes of this Agreement, any Person shall be deemed to be the owner
of the leasehold or other interest in any property which it has
acquired or holds subject to a lease and the owner of any property
which it has acquired or holds subject to a conditional sale agreement
or other similar arrangement pursuant to which title to the property
has been retained by or vested in some other Person for security
purposes.
"Person" means an individual, corporation, partnership,
association, joint venture, trust, or unincorporated organization, or a
government or any agency or political subdivision thereof.
"Preferred Shares" means shares of Series B Preferred Stock.
"Purchaser" has the meaning specified in the introduction to
this Agreement, and its successors and permitted assigns.
"Recapitalization Event" means any stock dividend, stock
split, combination, reorganization, recapitalization, reclassification,
consolidation, merger or similar event involving a change in the
Company's corporate structure.
"Registrable Shares" means (i) the Shares, (ii) the Conversion
Shares, (iii) any shares of Common Stock issued to the Purchasers upon
a redemption of the Series B Preferred Stock and (iv) any other shares
of Common Stock issued to the Purchasers in respect of the foregoing
Shares because of any Recapitalization Event.
"Securities Act" means the Securities Act of 1933 or any
successor Federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
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<PAGE>
"Shares" or "Securities" means the Common Shares and the
Preferred Shares, collectively.
"Subsidiary" or "Subsidiaries" shall mean any corporation,
partnership, trust or other entity of which the Company and/or any of
its other Subsidiaries directly or indirectly owns at the time a
majority of the outstanding shares of any class of equity security of
such corporation, partnership, trust or other entity.
"Warrants" shall mean the stock purchase warrants issued
pursuant to the Warrant Agreement dated as of March 28, 1997 entitling
the record holders thereof to purchase from the Company shares of
Common Stock, subject to adjustment as provided in the Warrant
Agreement; individually, a "Warrant".
"Warrant Agreement" shall mean the Warrant Agreement dated as
of March 28, 1997 by and between the Company and the Purchasers
identified therein, pursuant to which the Warrants have been issued and
have been exercisable at the Exercise Price (as defined therein) at any
time after each respective Closing Date and before 5:00 P.M., New York
time, on the Expiration Date (as defined therein), as amended, modified
or supplemented from time to time.
ARTICLE II
PURCHASE AND SALE OF THE SECURITIES
SECTION 2.01 AUTHORIZATION OF THE SHARES. The Company has authorized
the issuance and sale of 200,000 shares of Series B Preferred Stock having the
rights, restrictions and privileges and preferences set forth in the Certificate
of Designation attached hereto as EXHIBIT A (the "Series B Certificate of
Designation") and an aggregate of 550,000 shares of Common Stock.
SECTION 2.02 CLOSING. The initial closing of the transactions
contemplated by this Agreement (the "INITIAL CLOSING") and any subsequent
closings (each, a "SUBSEQUENT CLOSING"; the Initial Closing and each Subsequent
Closing, are each herein referred to as a "Closing") for the sale of additional
shares of Series B Preferred Stock and Common Stock pursuant to the terms of
this Agreement shall take place at the offices of Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C. at 5:00 p.m. on March 31, 1999, or at such other place
or on such other date as the Company and the Purchasers set forth on SCHEDULE A
(as amended from time to time by the Company and the Purchasers set forth
therein) shall agree. At the Initial Closing and at any Subsequent Closing,
subject to the terms and conditions set forth in this Agreement, the Company
agrees to issue and sell to the Purchasers set forth on SCHEDULE A (as amended
from time to time) and the Purchasers, severally but not jointly, agree to
purchase from the Company, (i) that number of Preferred Shares set forth
opposite their respective names on SCHEDULE A under the caption "Number of
Preferred Shares Purchased at Closing" at a purchase price equal to Four Dollars
and Zero Cents ($4.00) per share of Series B Preferred Stock and (ii) that
number of Common Shares set forth opposite their respective names on
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<PAGE>
SCHEDULE A under the caption "Number of Common Shares Purchased at Closing" (A)
at a purchase price equal to One Dollar and Two Hundred Seventy-Three Thousandth
cents ($1.273) per share of Common Stock or (B) represented by the Warrants
surrendered by the Purchasers, such number as set forth opposite their
respective names on SCHEDULE A under the caption "Number of Warrants Surrendered
at Closing." At each Closing, the Company will, subject to Article V, deliver to
each Purchaser certificates for the number of Preferred Shares and Common Shares
being purchased by such Purchaser registered in such Purchaser's name (or its
nominee), against (i) delivery of a check or checks payable to the order of the
Company, or a transfer of funds to the account of the Company by wire transfer,
representing the purchase price paid by such Purchaser for shares of Series B
Preferred Stock and either (A) the purchase price paid by Purchaser for shares
of Common Stock as set forth on SCHEDULE A or (B) surrender by such Purchaser of
the number of Warrants set forth opposite such Purchaser's name, if any, on
SCHEDULE A under the caption "Number of Warrants Surrendered at Closing,"
representing the purchase price for shares of Common Stock. At each Closing or
as soon as practicable after such Closing, each Purchaser with Warrants to
surrender as set forth on SCHEDULE A shall surrender such Purchaser's
certificates representing such Purchaser's Warrants to the Company (acting,
until such time as all certificates representing such Warrants shall have been
exchanged in accordance herewith, as Exchange Agent hereunder (the "Exchange
Agent")) in exchange for certificates representing such Purchaser's Common
Shares; PROVIDED that, notwithstanding the foregoing, on the Closing Date, by
virtue of the Closing and without any further action on the part of the
Purchasers, the Company or any other Person, (i) the Preferred Shares and the
Common Shares being purchased by the Purchasers shall be issued by the Company
and shall be deemed issued and outstanding capital stock of the Company for all
intents and purposes and (ii) any Warrants being surrendered by the Purchasers
shall be deemed to be surrendered and canceled by the Purchasers, whether or not
the certificates representing such Warrants have been physically surrendered or
delivered to the Company or its agent.
ARTICLE III
COMPANY REPRESENTATIONS AND WARRANTIES
In order to induce the Purchasers to enter into this Agreement and to
consummate the transactions contemplated hereby, the Company hereby represents
and warrants to the Purchasers as follows:
SECTION 3.01. ORGANIZATION AND GOOD STANDING. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Company has the requisite corporate power and
authority to own and operate its properties and assets and to carry on its
business as currently conducted. The Company is qualified to do business in the
State of Florida. The Company is not qualified to do business as a foreign
corporation in any other jurisdiction and such qualification is not now
required,
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except to the extent that the failure to so qualify would not have a material
adverse effect on the Company's business as currently conducted.
SECTION 3.02. CORPORATE POWER AND AUTHORIZATION. The Company has the
corporate power and authority to execute and deliver this Agreement, to issue
and sell the Shares hereunder and to issue and deliver the Conversion Shares
upon conversion of the Preferred Shares, and to perform its obligations under
the terms of this Agreement. All corporate action on the part of the Company,
its directors and stockholders necessary for the authorization, execution,
delivery and performance by the Company of this Agreement and the authorization,
sale, issuance and delivery of the Shares and the Conversion Shares has been
taken or will be taken prior to Closing. This Agreement constitutes the valid
and binding obligation of the Company, enforceable in accordance with its terms,
except as the enforceability thereof may be limited by bankruptcy, insolvency or
other laws relating to or affecting creditors' rights generally and by general
equitable principles. The Shares have been and the Conversion Shares will be
duly authorized and, when issued in compliance with the provisions of this
Agreement, will be validly issued, fully paid and nonassessable; and the Shares
and the Conversion Shares when issued and delivered in accordance with the terms
of this Agreement and (in the case of the Conversion Shares) the Series B
Certificate of Designation, will be free of any Liens or encumbrances created by
the Company; PROVIDED, HOWEVER, that the Shares and the Conversion Shares may be
subject to restrictions on transfer under state or federal securities laws as
set forth herein.
SECTION 3.03. CAPITALIZATION. The authorized capital stock of the
Company consists of 27,500,000 shares, divided into 25,000,000 shares of Common
Stock, par value $0.0001 per share, of which 6,731,395 shares are issued and
outstanding, and 2,500,000 shares of undesignated blank check preferred stock,
par value $0.001 per share ("Preferred Stock"), of which 300,000 shares have
been designated as Series A Redeemable Convertible Preferred Stock and of which,
200,000 shares shall be designated as Series B Preferred Stock in accordance
with the Series B Certificate of Designation prior to the Initial Closing. All
of the outstanding shares of Common Stock have been duly authorized and validly
issued and are fully paid and nonassessable. The Company has reserved (i) up to
200,000 shares of Common Stock for issuance upon exercise or conversion of the
Preferred Shares, (ii) up to 2,962,676 shares of Common Stock for issuance upon
exercise of warrants issued by the Company (including any Warrants being
surrendered pursuant hereto) and (iii) up to 1,075,723 shares of Common Stock
for issuance upon the exercise of options to purchase Common Stock issued by the
Company. SCHEDULE 3.03 sets forth the outstanding capitalization of the Company
as of the date hereof, including the material terms (expiration date, exercise
price, etc.) of such outstanding options and warrants and, except for such
outstanding options and warrants, there are no other options, warrants or other
rights outstanding to purchase or acquire, or any securities convertible into,
nor has the Company agreed to issue or reissue, other than pursuant to this
Agreement, any of the Company's authorized and unissued capital stock. Except as
set forth in the Certificate of Designations, Preferences and Rights of Series A
Redeemable Convertible Preferred Stock, there are no agreements or
understandings that affect or relate to the voting or giving of written consent
with respect to any of the Company's outstanding securities. There are no
preemptive rights with respect to the issuance or sale of
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<PAGE>
the Company's capital stock, and there are no restrictions on the transfer of
the Company's capital stock other than those arising from federal and state
securities laws.
SECTION 3.04. SEC REPORTS; FINANCIAL STATEMENTS. The Company has filed
with the Commission all forms, reports and documents required to be filed by it
pursuant to the Exchange Act, all of which, when filed, complied in all material
respects with all applicable requirements of the Exchange Act. The Purchasers
have been provided true and correct copies (not including exhibits) of the
Company's (i) Annual Report on Form 10-KSB for the fiscal year ended December
31, 1997, as filed with the Commission, (ii) Quarterly Reports on Form 10-QSB
for the quarters ended March 31, 1998 and June 30, 1998, in each case as filed
with the Commission, and (iii) proxy statements relating to all meetings of its
stockholders (whether annual or special) since December 31, 1997 and prior to
the date hereof (collectively, the "Company's SEC Reports"). As of their
respective dates, the Company's SEC Reports (not including any exhibits and
schedules thereto and documents incorporated by reference therein) did not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. The
audited financial statements and unaudited interim financial statements of the
Company included in the Company's SEC Reports or incorporated by reference
therein were prepared in accordance with generally accepted accounting
principles ("GAAP") (subject, in the case of such unaudited financial
statements, to the absence of complete footnotes) applied on a consistent basis
(except as indicated therein or in the notes thereto) and fairly present in all
material respects the financial position of the Company at the dates thereof and
the results of its operations and cash flows for the periods then ended (subject
in the case of the unaudited interim financial statements, to normal year-end
audit adjustments).
SECTION 3.05. ABSENCE OF CERTAIN DEVELOPMENTS. Since December 31, 1998,
there has been no change in the assets, liabilities, condition (financial or
otherwise), operating results, business or prospects of the Company from that
reflected in the Company's SEC Reports, except changes in the ordinary course of
business that have not been, individually or in the aggregate, materially
adverse to the assets, properties, condition (financial or otherwise), operating
results, business or prospects of the Company. Since December 31, 1998, the
Company has not (i) directly or indirectly declared or paid any dividend or
ordered or made any other distribution on account of any shares of any class of
the capital stock of the Company, (ii) directly or indirectly redeemed,
purchased or otherwise acquired any such shares or agreed to do so or set aside
any sum or property for any such purpose, (iii) made any capital expenditures
exceeding $100,000, or (iv) incurred any indebtedness exceeding $100,000.
SECTION 3.06. COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
violation or default of any provision of its Certificate of Incorporation or
By-Laws or of any material mortgage, indenture, contract, agreement, instrument,
judgment or decree to which the Company is a party or by which it is bound. The
execution, delivery and performance by the Company of this Agreement and the
consummation of the transactions contemplated hereby will not result in any
violation of or conflict with the Company's Certificate of Incorporation
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or By-Laws, and will not result in any violation of or conflict with, or
constitute a default under, any material mortgage, indenture, contract,
agreement, instrument, judgment or decree to which the Company is a party or by
which it is bound or in the creation of any material mortgage, pledge, Lien,
encumbrance or charge upon any of the properties or assets of the Company.
SECTION 3.07. REGISTRATION RIGHTS. Except as set forth in SCHEDULE
3.07 hereto, and the provisions of Article VII of this Agreement, the Company is
not under any contractual obligation to register under the Securities Act any of
its currently outstanding securities or any of its securities which may
hereafter be issued.
SECTION 3.08. GOVERNMENTAL CONSENT. No consent, approval or
authorization of or registration, qualification, designation, declaration or
filing with any governmental authority on the part of the Company is required in
connection with the valid execution, delivery and performance of this Agreement
or the offer, sale or issuance of the Shares and the Conversion Shares or the
consummation of any other transaction contemplated hereby, except for filings
that may be required to comply with applicable federal and state securities
laws.
SECTION 3.09. OFFERING. Subject to the accuracy of the
representations of the Purchasers in Article IV, the offer, sale and issuance of
the Shares as contemplated by this Agreement will constitute transactions exempt
from the registration requirements of Section 5 of the Securities Act.
SECTION 3.10. SUBSIDIARIES. The Company has no subsidiaries and does
not otherwise own or control, directly or indirectly, any equity interest in any
corporation, association, partnership or business entity, nor has the Company
made any commitment or subscribed for the purchase of any such equity interest.
SECTION 3.11. ABSENCE OF UNDISCLOSED LIABILITIES. The Company does
not have any liability or obligation, absolute or contingent, that is not
reflected in the financial statements included in the Company's SEC Reports,
other than obligations and liabilities which taken individually or in the
aggregate would not have a material adverse effect on the Company's assets,
liabilities, condition (financial or otherwise), operating results, business or
prospects.
SECTION 3.12. TAXES. The Company has filed all tax returns and
reports required by law to be filed, and has paid all taxes, assessments and
other governmental charges that are due and payable, except for those matters
reasonably being contested by the Company and those matters which, individually
and in the aggregate, would not have a material adverse effect on the Company's
assets, liabilities, condition (financial or otherwise), operating results,
business or prospects. The charges, accruals and reserves on the books of the
Company in respect of taxes are considered adequate by the Company, and the
Company knows of no assessment for additional taxes or any basis therefor.
SECTION 3.13. TITLE TO PROPERTIES: LIENS AND ENCUMBRANCES. The
Company has good title to all properties and assets which it owns or purports to
own, both real and personal, tangible and intangible, reflected on the balance
sheet included in the financial statements
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included in the Company's SEC Reports or acquired after the date thereof (except
inventory or other personal property disposed of in the ordinary course of
business subsequent to the date thereof), and such properties and assets are not
subject to any mortgage, pledge, Lien, security interest, encumbrance or charge
other than (i) Liens for current taxes not yet due and payable, (ii) Liens and
encumbrances that do not materially detract from the value of the property
subject thereto or materially impair the operations of the Company, or (iii)
Liens securing obligations reflected in such financial statements. With respect
to properties or assets it leases, the Company is in compliance with such leases
(except for such defaults or breaches that would not have a material adverse
affect on the Company) and holds valid leasehold interests free of any Liens,
claims or encumbrances except for those described in subsections (i) through
(iii) hereof.
SECTION 3.14. LITIGATION, ETC. There are no actions, suits,
proceedings or investigations (i) pending or, to the Company's knowledge,
threatened against the Company or which otherwise involve the Company's business
or operations, or (ii) to the Company's knowledge, pending or threatened against
any of its officers, directors or principal stockholders in their capacities as
officers, directors or stockholders.
SECTION 3.15. EMPLOYEES. To the Company's knowledge, no employee of
the Company is in violation of any term of any employment contract or any other
contract or agreement between such employee and the Company. None of the
employees of the Company is represented by any labor union, and there is no
strike or other labor dispute pending or, to the knowledge of the Company,
threatened, with respect to the Company.
SECTION 3.16. COMPLIANCE WITH LAW. The Company is conducting its
business and operations in material compliance with all governmental rules and
regulations applicable thereto, including without limitation those relating to
occupational safety, environmental, health and employment practices, and is not
in violation or default in any material respect under any statute, law,
ordinance, rule, regulation, judgment, order, decree, concession, grant,
franchise, license or other governmental authorization or approval applicable to
it or any of its properties.
SECTION 3.17. PERMITS. The Company has all permits, licenses, orders
and approvals of any federal, state, local or foreign governmental or regulatory
body (collectively, the "Permits") that are material to or necessary in the
conduct of its business as now conducted; all such Permits are in full force and
effect; no violations have been recorded in respect of any such Permits; and no
proceeding is pending or, to the knowledge of the Company, threatened to revoke
or limit any such Permits.
SECTION 3.18. BROKERS OR FINDERS. The Company has not retained any
investment banker, broker or finder in connection with the transactions
contemplated by this Agreement, and there are no brokerage commissions, finder's
fees or similar items of compensation payable in connection therewith based on
any arrangement or agreement made by or on behalf of the Company.
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SECTION 3.19. DISCLOSURE. This Agreement, including the schedules
hereto, was prepared in good faith by the Company and does not contain any
untrue statement of a material fact or omit a material fact necessary to make
the statements therein not misleading.
SECTION 3.20. INTELLECTUAL PROPERTY. The Company owns or possesses the
requisite licenses or rights to all trademarks, service marks, service names,
trade names, patents and patent applications, copyrights and other rights
(collectively the "Intangibles") described as owned or licensed by the Company
in the SEC Reports. There is no claim, action or proceeding by any person
pending or, to the Company's knowledge, threatened which pertains to or
challenges the validity, enforceability or exclusive right of the Company with
respect to any Intangibles used in the conduct of the Company's business except
as described in the SEC Reports. To the Company's knowledge, the Company's
current products, services and processes do not infringe on any Intangibles held
by any third party. Except as set forth in the agreements disclosed in the SEC
Reports, the Company is not under any obligation to pay royalties or fees of any
kind whatsoever to any third party with respect to technology it has developed,
uses, employs or intends to use or employ.
SECTION 3.21. MATERIAL CONTRACTS. All contracts, agreements (including
license agreements and any other agreements relative to the Company's
technology), leases or other commitments, written or oral, absolute or
contingent, to which the Company is a party are filed or incorporated by
reference as exhibits to the Company's SEC Reports, other than (i) contracts
entered into in the ordinary course of business, requiring the expenditure by
the Company or the payment to the Company of no more than $100,000 and (ii)
contracts terminable by the Company on no more than 30 days' notice without
material cost or liability to the Company. Each such material contract
(including, without limitation, contracts between the Company and each of (i)
the University of Florida Research Foundation, (ii) Warner-Lambert Co. and (iii)
Raymond Bergeron) is valid and in full force and effect, and no event of default
(or event or circumstance which, with the lapse of time or giving of notice, or
both, would constitute an event of default) exists under any such material
contract. The Company is not in breach of any of the material provisions of any
such material contract and, to the Company's knowledge, no other party to any
such material contract is in breach of any of the material provisions thereof.
SECTION 3.22. INTERESTED PARTY TRANSACTIONS. The Company is not a
guarantor or indemnitor of any indebtedness of any other person, firm or
corporation. Except as set forth in SCHEDULE 3.22 hereto, no stockholder,
executive officer or director of the Company, nor any immediate family member of
such person, is a party to any transaction with the Company which is or would be
required to disclose in the Company's SEC Reports pursuant to Item 404 of
Regulation S-K of the rules and regulations under the Securities Act and the
Exchange Act.
SECTION 3.23. BOOKS AND RECORDS. The minute books of the Company
reflect, in all material respects, all meetings and other corporate actions of
the stockholders and Board of Directors (and any committees thereof) of the
Company.
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SECTION 3.24. ERISA. Each employee benefit plan (within the meaning of
Section 3(3) the Employment Retirement Income Security Act of 1974, as amended
("ERISA")) which is subject to ERISA and/or the Internal Revenue Code of 1986,
as amended (the "Code") conforms to, and its operation and administration are in
compliance with, all applicable requirements of ERISA and/or the Code, as
applicable. There are no actions, suits or claims pending (other than routine
claims for benefits) or threatened against any employee plan or against the
assets of any employee plan. Each "Employee Welfare Benefit Plan" (as defined in
Section 3(1) of ERISA) covering any present or former employee of the Company
subject to the requirements of COBRA has complied with all requirements for
continuation coverage under group health benefit plans under COBRA and there are
no claims against the Company for a failure or alleged failure to comply with
the COBRA continuation requirements. The Company does not and has not ever
contributed to a "multiemployer plan" (as defined in Section 3(37) of ERISA) and
no amount is due or owing on account of any withdrawal therefrom.
Notwithstanding anything else set forth herein, the Company has incurred no
liability with respect to any such plan under ERISA (including, without
limitation Title I or Title IV of ERISA, other than liability for premiums due
to the Pension Benefit Guaranty Corporation), the Code or other applicable law,
which has not been satisfied in full, and no event has occurred, and there
exists no condition or set of circumstances which could result in the imposition
of any liability under ERISA (including, without limitation Title I or Title IV
of ERISA), the Code or other applicable law with respect to any such plan.
SECTION. 3.25 ENVIRONMENTAL LAWS.
(a) The Company is in compliance with all limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in any Applicable Environmental Laws, or in
any plan, order, decree, judgment, notice or demand letter issued, entered,
promulgated or approved thereunder. For purposes of this Agreement, the term
"Applicable Environmental Laws" shall mean Comprehensive Environmental Response,
Compensation and Liability Act of 1980,42 U.S.C. 9601 ET. SEQ. ("CERCLA");
Resource Conservation and Recovery Act of 1976,42 U.S.C. 6901 ET. SEQ. ("RCRA");
Federal Water Pollution Control Act, 33 U.S.C. 1251 ET. SEQ.; and Clean Air Act,
42 U.S.C. 7401 ET. SEQ. and any similar provisions of state or local law in any
jurisdictions where the properties of the Company are located, and the
regulations thereunder, and any other local, state and or federal laws or
regulations, whether currently in existence or hereafter enacted that govern.
(b) The Company is not aware of, nor has the Company
received notice of, any past present or future events, conditions,
circumstances, activities, practices, incidents, actions or plans which may
interfere with or prevent continued compliance, or which may give rise to any
common law or legal liability, or otherwise form the basis of any claim, action,
suit, proceeding, hearing or investigation, based on or related to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling, or the emission, discharge, release or threatened release
into the environment, of any pollutant, contaminant, or hazardous or toxic
material or waste.
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(c) No Hazardous Material has been incorporated in, used on,
stored on or under, released from, treated on, transported to or from, or
disposed of on or from any property owned or leased by the Company such that,
under Applicable Environmental Laws (i) any such Hazardous Material would be
required to be removed, cleaned-up or remediated before the property could be
altered, renovated, demolished or transferred, or (ii) the owner or lessee of
the property could be subjected to liability for the removal, clean-up or
remediation of such Hazardous Material; and the Company has not received any
notification from any Governmental Bodies or other third parties relating to
Hazardous Material on or affecting any property owned or leased by the Company
or relating to any potential or known liability under Applicable Environmental
Laws arising from the ownership or leasing of any property. For purposes of this
Agreement, "Hazardous Material" shall mean any substance which as of the date of
this Agreement shall be identified as "hazardous" or "toxic" or otherwise
regulated under CERCLA or RCRA or which has been or shall be determined at any
tine by any agency or court to be a hazardous or toxic substance under
Applicable Environmental Law. The term "Hazardous Material" shall also include,
without limitation, raw materials, building components, the products of any
manufacturing or other activities on the properties, wastes, petroleum, and
source, special nuclear or by-product material as defined by the Atomic Energy
Act of 1954,42 U.S.C. ss.ss. 3011 ET. seq., as amended.
ARTICLE IV
PURCHASER REPRESENTATIONS AND WARRANTIES
SECTION 4.01 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each
Purchaser represents and warrants to the Company as follows:
(a) INVESTMENT INTENT. Such Purchaser is acquiring the Shares as
indicated on Schedule A for its own account for the purpose of investment and
not with a view to, or for sale in connection with, the distribution thereof,
and that it has no present intention of distributing or selling such Shares.
(b) TRANSFER RESTRICTIONS. Such Purchaser understands that the Shares
and the Conversion Shares have not been registered under the Securities Act, or
the securities laws of any state or other jurisdiction, and hereby agrees not to
make any sale, transfer or other disposition of the same in the absence of (i)
an effective registration statement covering such securities under the
Securities Act and any securities laws of any applicable state or other
jurisdiction or (ii) an applicable exemption from registration under the
Securities Act (including, without limitation, pursuant to Rule 144 under the
Securities Act) and other applicable securities laws.
(c) OPPORTUNITY TO INVESTIGATE. Such Purchaser (i) has had the
opportunity to ask questions concerning the Company (including, without
limitation, the Company's prior financings) and all such questions posed have
been answered to such Purchaser's satisfaction; (ii) has been given the
opportunity to obtain any additional information it deems necessary to verify
the accuracy of any information obtained concerning the Company; and (iii) has
such
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knowledge and experience in financial and business matters that it is able
to evaluate the merits and risks of purchasing the Shares and to make an
informed investment decision relating thereto.
(d) ACCREDITED INVESTOR. Such Purchaser is an "accredited investor" as
such term is defined in Regulation D under the Securities Act.
(e) ORGANIZATION AND GOOD STANDING. If such Purchaser is not an
individual, such Purchaser is duly organized, validly existing and in good
standing under the laws of the State or country of its formation.
(f) POWER AND AUTHORIZATION. If such Purchaser is not an individual,
such Purchaser has the power and authority to enter into this Agreement, and the
execution, delivery and performance by such Purchaser of this Agreement have
been duly authorized by all necessary corporate or partnership action. This
Agreement constitutes the valid and binding obligation of such Purchaser,
enforceable in accordance with its terms, except as the enforceability thereof
may be limited by bankruptcy, insolvency or other laws relating to or affecting
creditors' rights generally and by general equitable principles.
(g) BROKERS OR FINDERS. There are, and there will be, no brokerage
commissions, finder's fees or similar items of compensation payable by the
Company in connection with any broker's or finder's arrangement or agreement
made by or on behalf of such Purchaser, and such Purchaser hereby indemnifies
the Company against the same.
ARTICLE V
CONDITIONS TO CLOSINGS
SECTION 5.01. CONDITIONS TO THE PURCHASERS' OBLIGATIONS. Each
Purchaser's obligation to purchase and pay for the Securities to be purchased by
it at the Closing is subject to the complete satisfaction by the Company, on or
before such Closing, of the following conditions:
(a) OPINION OF COMPANY'S COUNSEL. The Purchasers shall have received
from counsel for the Company, an opinion, dated the date of the Closing Date for
each Closing, an opinion dated the date of such Closing, in the form set forth
in EXHIBIT B hereto with respect to the Closing.
(b) REPRESENTATIONS AND WARRANTIES; OFFICER'S CERTIFICATE. The
Company's representations and warranties contained in Article III shall be true
and correct on and as of the date of each Closing with the same effect as if
made on and as of the date of such Closing. All agreements and conditions to be
performed or satisfied by the Company hereunder on or before the date of such
Closing shall have been duly performed or satisfied. The Company shall have
delivered to the Purchasers a certificate, dated the date of each Closing and
signed by the President of the Company, to such effect.
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(c) CONSENTS AND APPROVALS. The Company shall have delivered to the
Purchasers a certificate, dated the date of Initial Closing and for any
Subsequent Closing, dated as of the Subsequent Closing, signed by the President
of the Company, listing any consents, waivers, approvals, authorizations,
registrations, filings and notifications (including, without limitation those of
the character referred to in Section 3.08) which are necessary, to which shall
be attached evidence, satisfactory to the Purchasers, that the same have been
obtained or made and are in full force and effect, including the consent of the
two-thirds of the holders of Series A Redeemable Convertible Preferred Stock.
(d) CHARTER OF THE COMPANY. The Purchasers shall have received a copy
of the Company's Certificate of Incorporation thereof, certified as of a recent
date by the Delaware Secretary of State.
(e) CLOSING DOCUMENTS. The Purchasers shall have received (i)
certificates representing the Shares registered in the names of the Purchasers,
(ii) such certificates as to the good standing of the Company and certificates
of officers of the Company as counsel to the Purchasers may reasonably request.
(f) SUFFICIENCY OF PROCEEDS. The Purchasers shall be satisfied that
the net proceeds from the issuance and sale of the Shares will be sufficient to
fund the Company's operations for a period of not less than three (3) months
following the Closing.
(g) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings and
all documents incident to the transactions contemplated by this Agreement and
the other agreements contemplated hereby shall be satisfactory in form and
substance to the Purchasers and their counsel, and the Purchasers and the
counsel shall have received copies of all documents and records relating
thereto. In addition, all financial, legal and other due diligence shall have
been completed to the reasonable satisfaction of the Purchasers.
(h) OTHER PURCHASERS. Each other Purchaser purchasing more than 10,000
Preferred Shares shall have tendered the purchase price and accepted delivery of
the Shares to be issued to them at the Closing as set forth in SCHEDULE A.
(i) PAYMENT OF FEES AND DISBURSEMENTS OF PURCHASERS. The costs, fees
and expenses of counsel to the Purchasers identified in Section 9.14 shall have
been paid in full.
(j) BOARD OF DIRECTORS. Upon the Closing, the Company shall have
caused to be appointed or elected to the Company's Board of Directors a
designated representative of the holders of the Series B Preferred Stock.
SECTION 5.02. CONDITIONS TO THE COMPANY'S OBLIGATIONS. The Company's
obligation to issue the Securities to the Purchasers at the Closing is subject
to the satisfaction of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of each Purchaser contained in Article IV shall be true, correct and complete in
all material respects
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on and as of the date of the Closing with the same force and effect as if they
had been made on and as of the date of the Closing.
(b) PAYMENT OF PURCHASE PRICE. Each Purchaser shall have delivered to
the Company and the Company shall have received payment in full of the cash
portion of the purchase price relating to the number of Securities to be
purchased by such Purchaser at the Closing.
(d) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings and
all documents incident to the transactions contemplated by this Agreement and
the other agreements contemplated hereby shall be satisfactory in form and
substance to the Company and its counsel, and the Company and its counsel shall
have received copies of all documents and records relating thereto.
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ARTICLE VI
COVENANTS OF THE COMPANY
SECTION 6.01 AFFIRMATIVE COVENANTS. The Company covenants and agrees
that, from the date of the Closing and thereafter so long as Fifteen Percent
(15%) of the number of Preferred Shares originally issued shall remain
outstanding, it shall, unless it has received the prior written consent or
written waiver of at least 66-2/3% of the holders of such outstanding Preferred
Shares, perform and observe the following covenants and provisions, and shall
cause each Subsidiary, if and when such Subsidiary exists, to perform and
observe the following covenants and provisions as applicable to such Subsidiary:
(a) FINANCIAL STATEMENTS; OTHER REPORTS. The Company and each
Subsidiary will maintain proper books of account and records in accordance with
GAAP applied on a consistent basis, and will deliver to each holder of Series B
Preferred Stock (or Affiliate transferee thereof) owning at least fifty thousand
Preferred Shares (each, a "Rights Holder"):
(i) as soon as available and in any event within forty-five
(45) days after the end of each of the first three quarters of each
fiscal year of the Company, a copy of the Company's quarterly Report on
Form 10-Q or Form 10-QSB, prepared in accordance with GAAP consistently
applied (subject to year-end audit adjustments), and duly certified by
the Chief Financial Officer of the Company;
(ii) as soon as available and in any event within ninety (90)
days after the end of each fiscal year of the Company, a copy of
Company's Annual report on Form 10-K or Form 10-KSB, prepared in
accordance with GAAP consistently applied, together with the annual
audit report for such year by one of the "big six" independent public
accountants of recognized standing;
(iii) promptly after sending, making available, or filing the
same, such other reports and financial statements as the Company shall
send or make available to the stockholders of the Company; and
(iv) in the event that the Company ceases to become subject to
the provisions of Section 13 or 15(d) of the Exchange Act, all reports
and other documents that would be required to be filed by the Company
under the Securities Act and the Exchange Act if the Company were then
subject to the provisions of Section 13 or 15(d) of the Exchange Act,
at the times and in the manner that such reports and documents would be
required to be so filed.
Neither the foregoing provisions of this Section 6.01(a) nor any other
provision of this Agreement shall be in limitation of any rights which a
Purchaser may have with respect to the books and records of the Company and its
Subsidiaries, or to inspect their properties or discuss their affairs, finances
and accounts, under the laws of the jurisdictions in which they are
incorporated.
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(b) BOARD OBSERVATION; INSPECTION. Each Rights Holder and such agents,
advisors and counsel as such Rights Holder may designate, may, at its expense,
(i) attend and observe each meeting (whether physical or telephonic) of the
Company's Board of Directors or any committee thereof (and with respect to which
the Company covenants and agrees to provide each Rights Holder with reasonable
advance notice) or (ii) visit and inspect any of the properties of the Company
and each Subsidiary, examine the books of account of the Company and each
Subsidiary, take extracts therefrom and discuss the affairs, finances and
accounts of the Company and each Subsidiary with its officers and employees and
public accountants (and by this provision the Company and each Subsidiary hereby
authorizes said accountants to discuss with such Rights Holder and such persons
its finances and accounts), at reasonable times and with reasonable prior notice
during normal business hours. All such visits and inspections shall be conducted
in a manner which will not unreasonably interfere with the normal business
operations of the Company and each Subsidiary.
(c) PRESERVATION OF CORPORATE EXISTENCE. The Company and each
Subsidiary will preserve and maintain its corporate existence, rights,
franchises and privileges in the jurisdiction of its incorporation, and qualify
and remain qualified, as a foreign corporation in each jurisdiction in which
such qualification is necessary or desirable in view of its business and
operations or the ownership of its properties. The Company and each Subsidiary
shall preserve and maintain all licenses and other rights to use patents,
processes, licenses, trademarks, trade names, inventions, copyrights and other
Intangibles owned or possessed by it and necessary to the conduct of its
business.
(d) COMPLIANCE WITH LAWS. The Company will comply, and cause each of
its Subsidiaries to comply, with all applicable laws, rules, regulations and
orders of any governmental authority, noncompliance with which could materially
adversely affect its business or condition, financial or otherwise.
(e) BOARD OF DIRECTORS. The Company shall at all times maintain
provisions in its By-laws or certificate of incorporation indemnifying all
directors against liability and providing for the advancement of expenses to the
maximum extent permitted under the laws of the jurisdiction of its
incorporation.
(f) AVAILABILITY OF COMMON STOCK. The Company shall, from time to
time, in accordance with the laws of the state of its incorporation increase the
authorized amount of Common Stock if at any time the number of shares of Common
Stock remaining unissued and available for issuance shall be insufficient to
permit the conversion of all the then outstanding Preferred Shares.
(g) USE OF PROCEEDS. The Company shall use the net proceeds from the
issuance and sale of the Shares solely to fund ordinary operating expenses of
the Company.
(h) CERTAIN PATENT MATTERS. The Company represents that certain of its
intellectual property is licensed to it by the University of Florida Research
Foundation (the "UFRF"). The Company agrees to comply with its royalty and other
contractual obligations
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to UFRF in order to maintain its rights to the intellectual property licensed by
UFRF, in each case to the extent it is commercially reasonable for the Company
to do so.
(i) INDEMNIFICATION. The Company shall indemnify, defend and hold each
Purchaser and its officers, directors, partners, employees and agents and each
other Person which controls (within the meaning of the Securities Act) such
Purchaser or any of its partners harmless against all liability, loss or damage,
together with all reasonable costs and expenses related thereto (including legal
and accounting fees and expenses), arising from, relating to, or connected with
(i) the untruth, inaccuracy or breach of any representations, warranties or
covenants contained herein or (ii) the use, generation, storage, release,
threatened release, discharge, disposal or presence of Hazardous Materials (as
defined below) on, under or about any properties owned or leased by the Company
by any Person during the period that the Company was the legal or equitable
owner of any properties owned or leased by the Company or which occurred prior
to such time and was otherwise actually known by, or should have been known by,
the Company. The obligation of the Company to indemnify each Purchaser and its
officers, directors, partners, employees and agents and each other Person which
controls (within the meaning of the Securities Act) such Purchaser or any of its
partners shall specifically cover and include, without limitation, all fines and
penalties imposed by federal, state or local authorities, costs of removing or
neutralizing the Hazardous Materials, injury to the property adjoining any
properties owned or leased by the Company, injury to persons living or working
on or about any properties owned or leased by the Company or adjoining or
otherwise affecting property, and all other indirect or consequential damages
incurred by each Purchaser and its officers, directors, partners, employees and
agents and each other Person which controls (within the meaning of the
Securities Act) such Purchaser or any of its partners.
SECTION 6.02 CERTAIN NEGATIVE COVENANTS. Without limiting any other
covenants or provisions hereof, the Company covenants and agrees that it will
comply with and observe the following negative covenants and provisions, and
will cause each Subsidiary to comply with and observe such of the following
covenants and provisions as are applicable to such Subsidiary, if and when such
Subsidiary exists, and will not without the written consent or written waiver of
the holders of at least 66-2/3% of the holders of the Series B Preferred Stock,
do any of the actions set forth in the following covenants and provisions so
long as any Series B Preferred Stock remains outstanding:
(a) NO AVOIDANCE. The Company will not, by amendment of its
Certificate of Incorporation or through any consolidation, merger,
reorganization, transfer of assets, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Agreement or the certificates evidencing the
issuance of the Conversion Shares. Without limiting the generality of the
foregoing, the Company (i) will not permit the par value or the determined or
stated value of any shares of the Company's Common Stock receivable upon the
conversion of the Preferred Shares to exceed the amount payable therefor upon
such exercise, (ii) will take all such action as may be necessary or appropriate
in order that the Company may validly and legally issue fully paid and
non-assessable shares of the Company's Common Stock, upon the conversion of the
Preferred Shares
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from time to time outstanding, including, without limitation, amending its
Certificate of Incorporation to reduce or eliminate the par value of the Common
Stock and (iii) will not take any action which results in an adjustment in the
number of Conversion Shares obtainable upon the conversion of the Preferred
Shares if the total number of shares of the Company's Common Stock (or other
securities) issuable after such action upon the exercise or conversion of all of
the then-outstanding Preferred Shares would exceed the total number of shares of
the Company's Common Stock (or other securities) then authorized by the
Company's Certificate of Incorporation and available for purpose of issuance
upon such exercise.
(b) PROTECTIVE PROVISIONS. The Company shall not engage in any of the
actions specified in Section 5 of the Series B Certificate of Designation.
(c) TRANSACTIONS WITH RELATED PARTIES. Other than in the ordinary
course of business of the Company, neither the Company nor any Subsidiary will
engage in any transaction with, or enter into any contract, agreement or other
arrangement providing for, the employment of, furnishing of services by, rental
of real or personal property from, or otherwise requiring payments to, any
officer, employee or director of the Company or any Related Party of such
persons or entities (other than pursuant to the terms of employment or
consulting arrangements by the Company disclosed in the Company's SEC Reports or
any such agreements that hereafter shall be approved by the Company's Board of
Directors). For purposes of this Agreement, "Related Party" shall mean any
individual who is a director or officer of the Company; any Person who is an
"affiliate" of the Company, as such term is defined in Rule 405 under the
Securities Act; any Person that owns five percent or more of the outstanding
equity stock of any class of the Company; any member of the family (as defined
in Section 267(c)(4) of the Internal Revenue Code) of, or any individual who has
the same home as, any individual (or the spouse of any such individual)
described above; and any trust, estate or partnership of which an individual
described above is a guarantor, fiduciary, beneficiary or partner.
(d) BUSINESS. The Company will only engage in the business of
research, development and production of pharmaceutical products and activities
ancillary thereto.
(e) CONFLICTING AGREEMENTS. The Company will not enter into any
agreement which by its terms might restrict the performance of the Company's
obligations pursuant to the terms of this Agreement or the provisions relating
to the Series B Preferred Stock included in the Series B Certificate of
Designation, including, but not limited to, registration rights and the payment
of dividends on, the redemption, voting or conversion of the Series B Preferred
Stock.
(f) EMPLOYEE STOCK AND STOCK OPTIONS. The Company will not issue
Common Stock or stock options to its officers, directors, employees or others
who render services to the Company except for issuances of stock options and
issuances of shares of Common Stock upon exercise of such stock options which,
in each case, constitute Excluded Shares (as defined in the Series B Certificate
of Designation).
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(g) NO CHANGES. Between the date of execution of this Agreement and
the Closing Date, and except for the filing of the Series B Certificate of
Designation, the Company shall not, without the prior written consent of the
Purchasers: (a) issue any capital stock or any option, warrant or right to
acquire capital stock; (b) organize any Subsidiary; (c) make any change in its
capital stock; (d) declare or pay any dividends or make any distributions in
respect of its capital stock; (e) enter into any merger or consolidation or
other business combination, (f) repurchase any stock, or (g) enter into any
material transaction, agreement, understanding or commitment; provided that, for
purposes of (g) above, the prior written consent of the Purchasers shall not be
required in the event that the directors selected by the Purchasers consent to
such action.
(h) ENVIRONMENTAL MATTERS.
(i) The Company shall promptly advise each holder
of the Series B Preferred Stock in writing of any pending or threatened claim,
demand or action by any governmental body or third party relating to any
Hazardous Materials affecting any properties owned or leased by the Company of
which it has knowledge. The Company shall not discharge, place, release, spill
or dispose of any Hazardous Materials or any other pollutants or effluents upon
any properties owned or leased by the Company or elsewhere (including, but not
limited to, underground injection of such substances) other than in compliance
with the Applicable Environmental Laws and the Company shall not discharge into
the air any emission which would require a permit under the Clean Air Act or its
state counterparts or any other Applicable Environmental Laws. The stockholders
of the Company shall have no control over, or authority with respect to, the
waste disposal operations of the Company.
(ii) The use of any property by the Company, and
any future development, construction and operation of property purchased, leased
or otherwise acquired by the Company, shall, in all respects, comply with, and
are or shall be, lawful, permitted and conforming uses in all material respects
under all applicable building, fire, safety, subdivision, zoning, sewer,
environmental, securities, health, insurance and other laws, ordinances, rules,
regulations and plan approval conditions of any governmental or public body or
authority.
SECTION 6.03 CERTAIN ADDITIONAL NEGATIVE COVENANTS. Without limiting
any other covenants or provisions hereof, the Company covenants and agrees that
it will comply with and observe the following negative covenants and provisions,
and will cause each Subsidiary to comply with and observe such of the following
covenants and provisions as are applicable to such Subsidiary, if and when such
Subsidiary exists, and will not without the written consent or written waiver
(which consent or waiver shall not be unreasonably withheld) of the holders of
at least 66-2/3% of the holders of the Series B Preferred Stock, do any of the
actions set forth in the following covenants and provisions so long as any
Series B Preferred Stock remains outstanding:
(a) INDEBTEDNESS: COMMITMENTS. The Company will not incur (a)
Indebtedness in excess of $100,000, or (b) Commitments (defined below) in excess
of $100,000 in the aggregate. For purposes of this Agreement, "Commitments"
shall mean all obligations of the Company and its Subsidiaries, contingent or
otherwise, pursuant to long-term leases (other
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than leases for real property), or other obligations pursuant to similar
agreements which, in each case, are required to be capitalized in accordance
with GAAP.
(b) GUARANTEES. The Company will not incur any guarantee or similar
contingent obligation in respect of the Indebtedness of others in excess of
$100,000, whether or not classified on the Company's balance sheet as a
liability.
(c) NO ACQUISITIONS. The Company shall not, nor shall it permit any of
its Subsidiaries to, acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial equity interest in or a substantial portion
of the assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof or
otherwise acquire or agree to acquire, or permit any of its Subsidiaries to
acquire or agree to acquire, any assets for a purchase price which is in excess
of ten percent (10%) of the Company's net worth.
(d) NO DISPOSITIONS. Other than in the ordinary course of business and
other than dispositions of obsolete assets, the Company will not, nor shall it
permit any of its Subsidiaries to, sell, lease, encumber or otherwise dispose of
or agree to sell, lease, encumber or otherwise dispose of, in any transaction or
series of related transactions, assets having an aggregate book value in excess
of ten percent (10%) of the Company's net worth.
SECTION 6.04.
(a) TERMINATION OF SECTION 6.03 CERTAIN ADDITIONAL NEGATIVE COVENANTS.
The Company's obligations under the provisions set forth in Section 6.03 above
shall terminate on the earlier to occur of (i) the second anniversary of the
Closing Date or (ii) the date on which the closing price of the Common Shares of
the Company on NASDAQ (or, if not then listed on NASDAQ, listed on any other
national securities market) shall have exceeded $10.00 per share (subject to
adjustment) for a period of 60 consecutive days.
ARTICLE VII
REGISTRATION RIGHTS
SECTION 7.01.
(a) INCIDENTAL REGISTRATION. If the Company at any time (other than
pursuant to subsection (b) below)) proposes to register any of its securities
under the Securities Act for sale to the public, whether for its own account or
for the account of other security holders or both (except with respect to
registration statements on Forms S-4, S-8 or any successor to such forms or
another form not available for registering the Registrable Securities for sale
to the public), each such time it will promptly give written notice to all
holders of the Registrable Securities of its intention so to do. Upon the
written request of any such holder, received by the Company within thirty (30)
days after the giving of any such notice by the Company, to register any or all
of its Registrable Securities, the Company will use its best efforts to cause
the Registrable
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Securities as to which registration shall have been so requested to be included
in the securities to be covered by the registration statement proposed to be
filed by the Company, all to the extent requisite to permit the sale or other
disposition by the holder (in accordance with its written request) of such
Registrable Securities so registered. If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise the holders of Registrable Securities as a part of the
written notice given pursuant to this Section 7.01(a). In such event the right
of any holder of Registrable Securities to registration pursuant to this Section
7.01(a) shall be conditioned upon such holder's participation in such
underwriting to the extent provided herein. All holders of Registrable
Securities proposing to distribute their securities through such underwriting
shall (together with the Company and the Other Shareholders (as defined below)
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for underwriting by the Company. Notwithstanding any other provision of
this Section 7.01(a), if the underwriter determines that marketing factors
require a limitation on the number of shares to be underwritten, the Company
shall so advise all holders of securities requesting registration of any
limitations on the number of shares to be underwritten, and the number of shares
of securities that are entitled to be included in the registration and
underwriting shall be allocated (i) first to the Company with respect to shares
of Common Stock being sold for its own account; and (ii) then, to holders of
Registrable Securities and Other Shareholders requesting registration in
proportion, as nearly as practicable, to the respective amounts of securities
owned by them. Notwithstanding the foregoing provisions, the Company may
withdraw any registration statement referred to in this Section 7.01(a) without
thereby incurring any liability to the holders of Registrable Securities. If any
holder of Registrable Securities disapproves of the terms of any such
underwriting, it may elect to withdraw therefrom by written notice to the
Company and the underwriter. Any Registrable Securities or other securities
excluded or withdrawn from such underwriting shall be withdrawn from such
registration.
(b) REGISTRATION ON FORM S-3.
(i) In addition to the rights provided in Section 7.01(a), subject to
a limit of one (1) registration hereunder in any six (6) month
period, if at any time (A) any holder or holders of the
Registrable Securities request that the Company file a
registration statement on Form S-3 or any comparable or successor
form thereto for a public offering of all or any portion of the
shares of Registrable Securities held by such requesting holder or
holders, the reasonably anticipated aggregate price to the public
of which would exceed US $500,000, and (B) the Company is a
registrant entitled to use Form S-3 or any comparable or successor
form thereto to register such shares, then the Company shall use
its best efforts to register under the Securities Act on Form S-3
or any comparable or successor form thereto, for public sale in
accordance with the method of disposition specified in such
notice, the number of shares of Registrable Securities specified
in such notice.
(ii) Following receipt of any notice under this Section 7.01(b), the
Company shall immediately notify all holders of Registrable
Securities from whom notice has not been received and such holders
shall then be entitled within thirty (30) days after
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receipt of such notice from the Company to request the Company to
include in the requested registration all or any portion of their
shares of Registrable Securities. The Company shall use its best
efforts to register under the Securities Act, for public sale in
accordance with the method of disposition specified in the notice
from requesting holders described in paragraph (a) above, within
45 days of its receipt of such notice, the number of shares of
Registrable Securities specified in such notice (and in all
notices received by the Company from other holders within thirty
(30) days after the receipt of such notice by such holders).
Notwithstanding anything to the contrary contained herein, no
request may be made under this Section 7.01(b) after the
effective date of a registration statement filed by the Company
covering a firm commitment underwritten public offering and prior
to the later to occur of the completion of the period of
distribution for such offering or 90 days after the effective
date of such registration statement.
(iii) If the holders requesting such registration intend to distribute
the Registrable Securities covered by their request by means of
an underwriting, they shall so advise the Company as a part of
their request made pursuant to this Section 7.01(b) and the
Company shall include such information in the written notice
referred to in paragraph (ii) above. The right of any holder to
registration pursuant to this Section 7.01(b) shall be
conditioned upon such holder's agreeing to participate in such
underwriting and to permit inclusion of such holder's Registrable
Securities in the underwriting. If such method of disposition is
an underwritten public offering, the holders of at least a
majority in interest of the shares of Registrable Securities to
be sold in such offering may designate the managing underwriter
of such offering, which managing underwriter shall be reasonably
acceptable to the Company. A holder may elect to include in such
underwriting all or a part of the Registrable Securities it
holds.
(iv) A registration statement filed pursuant to this Section 7.01(b)
may, subject to the following provisions, include (A) shares of
Common Stock for sale by the Company for its own account, (B)
shares of Common Stock held by officers or directors of the
Company and (C) shares of Common Stock held by persons who are
entitled to include such shares in such registration (the "Other
Shareholders"), in each case for sale in accordance with the
method of disposition specified by the requesting holders;
PROVIDED, HOWEVER, that if the number of shares so included
pursuant to clauses (A), (B) and (C) above exceeds the number of
Registrable Securities presented by the holders requesting
registration thereof, then such registration shall be deemed to
be a registration in accordance with Section 7.01(a). If such
registration shall be underwritten, the Company, such officers
and directors and Other Shareholders proposing to distribute
their shares through such underwriting shall enter into an
underwriting agreement in customary form with the representative
of the underwriter or underwriters selected for such underwriting
on terms no less favorable to such officers, directors or Other
Shareholders than the terms afforded the holders of Registrable
Securities. If and to the extent that the managing underwriter
determines that marketing factors
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require a limitation on the number of shares to be included in
such registration, then the shares of Common Stock held by
officers or directors (other than Registrable Securities) of the
Company or by Other Shareholders (other than Registrable
Securities) and shares of Common Stock to be sold by the Company
for its own account shall be excluded from such registration to
the extent so required by such managing underwriter, and unless
the holders of such shares and the Company have otherwise agreed
in writing, such exclusion shall be applied first to the shares
held by the directors and officers and the Other Shareholders to
the extent required by the managing underwriter, then to the
shares of Common Stock of the Company to be included for its own
account to the extent required by the managing underwriter. If
the managing underwriter determines that marketing factors
require a limitation of the number of Registrable Securities to
be registered under this Section 7.01(a), then Registrable
Securities shall be excluded in such manner that the securities
to be sold shall be allocated among the selling holders pro rata
based on their ownership of Registrable Securities. In any event
all securities to be sold other than Registrable Securities will
be excluded prior to any exclusion of Registrable Securities. No
Registrable Securities or any other security excluded from the
underwriting by reason of the underwriter's marketing limitation
shall be included in such registration. If any holder of
Registrable Securities, officer, director or Other Shareholder
who has requested inclusion in such registration as provided
above, disapproves of the terms of the underwriting, such holder
of securities may elect to withdraw therefrom by written notice
to the Company and the managing underwriter. The securities so
withdrawn shall also be withdrawn from registration. Except for
registration statements on Form S-4, S-8 or any comparable form
or successor thereto, the Company will not file with the
Commission any other registration statement with respect to its
Common Stock, whether for its own account or that of other
stockholders, from the date of receipt of a notice from
requesting holders pursuant to this Section 4.3 until the
completion of the period of distribution of the registration
contemplated thereby or 120 days after the effective date of such
registration, whichever is later.
SECTION 7.02. REGISTRATION PROCEDURES. In connection with the Company's
requirement to use its best efforts to effect the registration of any
Registrable Shares under the Securities Act, the Company will, as expeditiously
as possible:
(a) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
the period specified herein and comply with the provisions of the Securities Act
with respect to the disposition of all Registrable Shares covered by such
registration statement in accordance with the sellers' intended method of
disposition set forth in such registration statement for such period;
(b) furnish to each seller of Registrable Shares such number of
copies of the registration statement and each such amendment and supplement
thereto (in each case including all exhibits) and the prospectus included
therein (including each preliminary
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prospectus) as such persons reasonably may request in order to facilitate the
public sale or other disposition of the Registrable Shares covered by such
registration statement;
(c) use its best efforts to register or qualify the Registrable
Shares covered by such registration statement under the securities or "blue sky"
laws of such jurisdictions as the sellers of Registrable Shares reasonably shall
request, PROVIDED, HOWEVER, that the Company shall not for any such purpose be
required to qualify generally to transact business as a foreign corporation in
any jurisdiction where it is not so qualified or to consent to general service
of process in any such jurisdiction, unless the Company is already subject to
service in such jurisdiction;
(d) use its best efforts to list the Registrable Shares covered
by such registration statement with any securities exchange on which the Common
Stock of the Company is then listed;
(e) comply with all applicable rules and regulations under the
Securities Act and Exchange Act;
(f) immediately notify each seller of Registrable Shares under
such registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any event
of which the Company has knowledge as a result of which the prospectus contained
in such registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances then existing, and promptly prepare and furnish to such seller
a reasonable number of copies of a prospectus supplemented or amended so that,
as thereafter delivered to the purchasers of such Registrable Shares, such
prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing;
(g) make available for inspection by each seller of Registrable
Shares, and any attorney, accountant or other agent retained by such seller
reasonable access to all financial and other records, pertinent corporate
documents and properties of the Company, as such parties may reasonably request,
and cause the Company's officers, directors and employees to supply all
information reasonably requested by any such seller, attorney, accountant or
agent in connection with such registration statement;
(h) cooperate with the selling holders of Registrable Shares to
facilitate the timely preparation and delivery of certificates representing
Registrable Shares to be sold, such certificates to be in such denominations and
registered in such names as such holders or the managing underwriter may request
at least two business days prior to any sale of Registrable Shares; and
(i) permit any holder of Registrable Shares which holder, in the
sole and exclusive judgment, exercised in good faith, of such holder, might be
deemed to be a
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controlling person of the Company, to participate in good faith in the
preparation of such registration or comparable statement and to require the
insertion therein of material, furnished to the Company in writing, which in the
reasonable judgment of such holder and its counsel should be included.
In connection with each registration hereunder, the sellers of
Registrable Shares will furnish to the Company in writing such information
requested by the Company with respect to themselves and the proposed
distribution by them as shall be necessary in order to assure compliance with
Federal and applicable state securities laws; and such sellers shall provide the
Company with appropriate representations with respect to the accuracy of such
information.
SECTION 7.03. EXPENSES. All expenses incurred in complying with
Sections 7.01 and 7.02, including, without limitation, all registration and
filing fees, printing expenses, fees and disbursements of counsel and
independent public accountants for the Company, fees and expenses (including
counsel fees) incurred in connection with complying with state securities or
"blue sky" laws, fees of the National Association of Securities Dealers, Inc.,
transfer taxes, fees of transfer agents and registrars, and reasonable fees and
disbursements of one counsel selected by a majority in interest of the sellers
of Registrable Shares, shall be paid by the Company.
SECTION 7.04. INDEMNIFICATION AND CONTRIBUTION.
(a) In the event of a registration of any of the Registrable
Shares under the Securities Act pursuant to this Article VII, the Company will
indemnify and hold harmless each holder of Registrable Shares, its officers,
directors and partners, and each other person, if any, who controls such holder
within the meaning of the Securities Act, against any losses, claims, damages or
liabilities, joint or several, to which such holder, officer, director, partner
or controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon (i) any untrue statement or alleged
untrue statement of any material fact contained in any prospectus, offering
circular or other document incident to such registration (including any related
notification, registration statement under which such Registrable Shares were
registered under the Securities Act pursuant to Section 7.01, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereof), (ii) any blue sky application or other document executed by the
Company specifically for that purpose or based upon written information
furnished by the Company filed in any state or other jurisdiction in order to
qualify any or all of the Registrable Shares under the securities laws thereof
(any such application, document or information herein called a "Blue Sky
Application"), (iii) any omission or alleged omission to state in any such
registration statement, prospectus, amendment or supplement or in any Blue Sky
Applications executed or filed by the Company, a material fact required to be
stated therein or necessary to make the statements therein not misleading, (iv)
any violation by the Company or its agents of the Securities Act or any rule or
regulation promulgated under the Securities Act applicable to the Company or its
agents and relating to action or inaction required of the Company in connection
with such registration, or
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(v) any failure to register or qualify the Registrable Shares in any state where
the Company or its agents has affirmatively undertaken or agreed in writing that
the Company will undertake such registration or qualification (provided that in
such instance the Company shall not be so liable if it has used its best efforts
to so register or qualify the Registrable Shares) and will reimburse each such
seller, and such officer, director and partner, and each such controlling person
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action,
promptly after being so incurred, PROVIDED, HOWEVER, that the Company will not
be liable in any such case if and to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission so made in conformity
with written information furnished by any such holder or any such controlling
person in writing specifically for use in such registration statement or
prospectus.
(b) In the event of a registration of any of the Registrable
Shares under the Securities Act pursuant to this Article VII, each seller of
such Registrable Shares thereunder, severally and not jointly, will indemnify
and hold harmless the Company, each person, if any, who controls the Company
within the meaning of the Securities Act, each officer of the Company who signs
the registration statement, each director of the Company, each other seller of
Registrable Shares against all losses, claims, damages or liabilities, joint or
several, to which the Company or such officer, director or other seller may
become subject under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in any prospectus offering circular or other document incident to
such registration (including any related notification, registration statement
under which such Registrable Shares were registered under the Securities Act
pursuant to Section 7.01, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereof), or any Blue Sky
Application or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse the Company and
each such officer, director and other seller for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action, promptly after being so incurred,
PROVIDED, HOWEVER, that such seller will be liable hereunder in any such case if
and only to the extent that any such loss, claim, damage or liability arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission made in reliance upon and in conformity with information
pertaining to such seller, as such, furnished in writing to the Company by such
seller specifically for use in such registration statement or prospectus; and
PROVIDED, FURTHER, HOWEVER, that the liability of each seller hereunder shall be
limited to the proportion of any such loss, claim, damage, liability or expense
which is equal to the proportion that the public offering price of the
securities sold by such seller under such registration statement bears to the
total public offering price of all securities sold thereunder, but not in any
event to exceed the proceeds received by such seller from the sale of
Registrable Shares covered by such registration statement.
(c) Promptly after receipt by an indemnified party hereunder of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to
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be made against the indemnifying party hereunder, notify the indemnifying party
in writing thereof, but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to such indemnified party
other than under this Section and shall only relieve it from any liability which
it may have to such indemnified party under this Section if and to the extent
the indemnifying party is prejudiced by such omission. In case any such action
shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate in and, to the extent it shall wish, to assume and
undertake the defense thereof with counsel satisfactory to such indemnified
party, and, after notice from the indemnifying party to such indemnified party
of its election so to assume and undertake the defense thereof, the indemnifying
party shall not be liable to such indemnified party under this Section for any
legal expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation and of
liaison with counsel so selected, PROVIDED, HOWEVER, that, if the defendants in
any such action include both the indemnified party and the indemnifying party
and the indemnified party shall have reasonably concluded that there may be
reasonable defenses available to it which are different from or additional to
those available to the indemnifying party or that the interests of the
indemnified party reasonably may be deemed to conflict with the interests of the
indemnifying party, the indemnified party shall have the right to select a
separate counsel and to assume such legal defenses and otherwise to participate
in the defense of such action, with the expenses and fees of such separate
counsel and other expenses related to such participation to be reimbursed by the
indemnifying party as incurred. No indemnifying party, in the defense of any
such claim or action, shall, except with the consent of each indemnified party,
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such indemnified party of a release from all liability in respect to such
claim or action. Each indemnified party shall furnish such information regarding
itself or the claim in question as an indemnifying party may reasonably request
in writing and as shall be reasonably required in connection with defense of
such claim and litigation resulting therefrom.
(d) In order to provide for just and equitable contribution to
joint liability under the Securities Act in any case in which either (i) the
Company, any holder of Registrable Shares exercising rights under this
Agreement, or any controlling person of any such holder, makes a claim for
indemnification pursuant to this Section but it is judicially determined (by the
entry of a final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that this Section provides for indemnification in such case, or (ii)
contribution under the Securities Act may be required on the part of the
Company, any such selling holder or any such controlling person in circumstances
for which indemnification is provided under this Section; then, and in each such
case, the Company and such holder will contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after contribution
from others) in such proportion so that such holder is responsible for the
portion represented by the percentage that the public offering price of its
Registrable Shares offered by the registration statement bears to the public
offering price of all securities offered by such registration statement, and the
Company is responsible for the
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remaining portion; PROVIDED, HOWEVER, that, in any such case, (A) no such holder
of Registrable Shares will be required to contribute any amount in excess of the
proceeds received from the sale of all such Registrable Shares offered by it
pursuant to such registration statement; and (B) no person or entity guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) will be entitled to contribution from any person or entity who
was not guilty of such fraudulent misrepresentation.
(e) The indemnities and obligations provided in this Section
shall survive the transfer of any Registrable Shares by such holder.
ARTICLE VIII
LIMITATIONS AND RESTRICTIONS
SECTION 8.01. RESTRICTIONS ON SALES BY PURCHASERS. Each Purchaser
agrees that until the first anniversary of the Closing hereunder, it will not,
nor will it permit any of its Affiliates to sell or propose to sell any Shares
purchased at the Closing except as follows:
(a) A Purchaser may transfer Shares to any of its Affiliates;
(b) A Purchaser may sell its Shares pursuant to a tender offer or
exchange offer for all outstanding shares of the Company's Common Stock approved
by the Company's Board of Directors;
(c) A Purchaser may (i) if such Purchaser is a partnership,
distribute Shares to the partners of such partnership, (ii) transfer Shares to
such Purchaser's children and/or grandchildren and/or such Purchaser's spouse's
children and/or grandchildren, whether biological or adopted (collectively, such
Purchaser's "descendants"), (iii) transfer Shares to the trustee or trustees of
a trust revocable solely by such Purchaser, (iv) transfer Shares to the trustee
or trustees of an irrevocable trust the sole beneficiaries of which are such
Purchaser, his spouse and/or his descendants, (v) transfer Shares to a guardian
or conservator, or (vi) transfer any such shares in the event of death to such
Purchaser's heirs or the beneficiaries or the legal representative of his
estate; and
(d) A Purchaser may sell all or any part of the Shares owned by
Purchaser or its Affiliates pursuant to the registration rights provisions
contained in Article VII.
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ARTICLE IX
MISCELLANEOUS
SECTION 9.01. NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing, shall be addressed to the
receiving party's address set forth below or to such other address as a party
may designate by notice hereunder, and shall be either (i) delivered by hand,
(ii) made by telecopy or facsimile transmission (receipt confirmed) or (iii)
sent by international overnight or express courier.
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If to the Company: SunPharm Corporation
The Veranda, Suite 301
814 Highway AIA
Ponte Vedra Beach, FL 32082
Attn: President
FAX: (904) 394-2727
with a copy to: Cecilia Bryant, General Counsel
1400 Prudential Drive, Suite 7
Jacksonville, FL 32207
FAX: (904) 398-5477
If to a Purchaser: at its address on Schedule A hereto
with a copy to: Mintz Levin Cohn Ferris Glovsky and
Popeo, P.C.
One Financial Center
Boston, MA 02111
Attn: Lewis J. Geffen, Esq.
FAX: (617) 542-2241
All notices, requests, consents and other communications hereunder shall be
deemed to have been given either (i) if by hand, at the time of the delivery
thereof to the receiving party at the address of such party set forth above,
(ii) if made by telecopy or facsimile transmission, at the time that receipt
thereof has been acknowledged by electronic confirmation or otherwise, or (iii)
if sent by overnight or express courier, on the Business Day following the day
such notice is delivered to the courier service.
SECTION 9.02. LEGENDS. Each Purchaser acknowledges that, until
registered under the Securities Act and any applicable state securities laws or
transferred pursuant to the provisions of Rule 144 promulgated under the
Securities Act ("Rule 144"), each certificate representing a Share, whether upon
initial issuance or upon any transfer thereof, shall bear a legend (and the
Company and its transfer agent shall make a notation on its books of transfer to
such effect), prominently stamped or printed thereon, in substantially the
following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR THE SECURITIES LAWS OF ANY APPLICABLE STATE OR
OTHER JURISDICTION, HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT
WITH A VIEW TO DISTRIBUTION OR RESALE AND MAY NOT BE SOLD,
MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF (1) AN EFFECTIVE REGISTRATION STATEMENT
COVERING SUCH SECURITIES UNDER THE ACT AND ANY
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SECURITIES LAWS OF ANY APPLICABLE STATE OR OTHER
JURISDICTION, (2) AN EXEMPTION FROM REGISTRATION , PURSUANT
TO RULE 144 UNDER THE ACT OR (3) A WRITTEN OPINION IN FORM
AND SUBSTANCE SATISFACTORY TO THE COMPANY TO THE EFFECT THAT
REGISTRATION IS NOT REQUIRED PURSUANT TO SOME OTHER
APPLICABLE EXEMPTION FROM REGISTRATION UNDER THE ACT OR UNDER
OTHER APPLICABLE SECURITIES LAWS."
SECTION 9.03. ENTIRE AGREEMENT. This Agreement embodies the entire
agreement and understanding between the parties hereto with respect to the
provisions hereof and supersedes all prior oral or written agreements and
understandings relating to the provisions hereof, and no other statement,
representation, warranty, covenant or agreement of any kind not expressly set
forth in this Agreement shall affect, or be used to interpret, change or
restrict, the express terms and provisions of this Agreement.
SECTION 9.04. MODIFICATIONS AND AMENDMENTS. The terms and provisions of
this Agreement may be modified or amended only by written agreement executed by
the Company and the holders of not less than a majority of the outstanding, with
the Series B Preferred Stock and the Common Stock voting together as a single
class.
SECTION 9.05. WAIVERS AND CONSENTS. Except as otherwise expressly
provided herein, the terms and provisions of this Agreement may be waived, or
consent for the departure therefrom granted, only by written document executed
by the Company and the holders of not less than a majority of the outstanding
Shares. No such waiver or consent shall be deemed to be or shall constitute a
waiver or consent with respect to any other terms or provisions of this
Agreement, whether or not similar. Each such waiver or consent shall be
effective only in the specific instance and for the purpose for which it was
given, and shall not constitute a continuing waiver or consent.
SECTION 9.06. ASSIGNMENT. The rights and obligations under this
Agreement may not be assigned by either party hereto without the prior written
consent of the other party (which consent shall not be unreasonably withheld),
except that a Purchaser without the consent of the Company may assign this
Agreement or any of its rights or obligations (i) to an Affiliate of the
Purchaser or to an entity with which the Purchaser shall merge or consolidate or
to which the Purchaser shall sell or assign all or substantially all of its
assets or (ii) in compliance with the provisions of Section 4.01(b) or Section
8.01.
SECTION 9.07. BENEFIT. All statements, representations, warranties,
covenants and agreements in this Agreement shall be binding on the parties
hereto and shall inure to the benefit of the respective successors and permitted
assigns of each party hereto. Nothing in this Agreement shall be construed to
create any rights or obligations except among the parties hereto, and no person
or entity shall be regarded as a third-party beneficiary of this Agreement,
except for the persons entitled to indemnification pursuant to the provisions of
Article VII.
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<PAGE>
SECTION 9.08. GOVERNING LAW. This Agreement and the rights and
obligations of the parties hereunder shall be construed in accordance with and
governed by the law of the State of Delaware, without giving effect to the
conflict of law principles thereof.
SECTION 9.09. SEVERABILITY. In the event that any court of competent
jurisdiction shall determine that any provision, or any portion thereof,
contained in this Agreement shall be unenforceable in any respect, then such
provision shall be deemed limited to the extent that such court deems it
enforceable, and as so limited shall remain in full force and effect. In the
event that such court shall deem any such provision, or portion thereof, wholly
unenforceable, the remaining provisions of this Agreement shall nevertheless
remain in full force and effect.
SECTION 9.10. INTERPRETATION. The parties hereto acknowledge and agree
that: (i) each party and its counsel reviewed and negotiated the terms and
provisions of this Agreement and have contributed to its revision; (ii) the rule
of construction to the effect that any ambiguities are resolved against the
drafting party shall not be employed in the interpretation of this Agreement;
and (iii) the terms and provisions of this Agreement shall be construed fairly
as to all parties hereto and not in favor of or against any party, regardless of
which party was generally responsible for the preparation of this Agreement.
SECTION 9.11. HEADINGS AND CAPTIONS. The headings and captions of the
various subdivisions of this Agreement are for convenience of reference only and
shall in no way modify, or affect the meaning or construction of any of the
terms or provisions hereof.
SECTION 9.12. ENFORCEMENT. Each of the parties hereto acknowledges and
agrees that the rights acquired by each party hereunder are unique and that
irreparable damage would occur in the event that any of the provisions of this
Agreement to be performed by the other party were not performed in accordance
with their specific terms or were otherwise breached. Accordingly, in addition
to any other remedy to which the parties hereto are entitled at law or in
equity, each party hereto shall be entitled to an injunction or injunctions to
prevent breaches of this Agreement by the other party.
SECTION 9.13. NO WAIVER OF RIGHTS, POWERS AND REMEDIES. No failure or
delay by a party hereto in exercising any right, power or remedy under this
Agreement, and no course of dealing between the parties hereto, shall operate as
a waiver of any such right, power or remedy of the party. No single or partial
exercise of any right, power or remedy under this Agreement by a party hereto,
nor any abandonment or discontinuance of steps to enforce any such right, power
or remedy, shall preclude such party from any other or further exercise thereof
or the exercise of any other right, power or remedy hereunder. The election of
any remedy by a party hereto shall not constitute a waiver of the right of such
party to pursue other available remedies. No notice to or demand on a party not
expressly required under this Agreement shall entitle the party receiving such
notice or demand to any other or further notice or demand in similar or other
circumstances or constitute a waiver of the rights of the party giving such
notice or demand to any other or further action in any circumstances without
such notice or demand.
33
<PAGE>
SECTION 9.14. EXPENSES. Each of the parties hereto shall pay its own
fees and expenses in connection with this Agreement and the transactions
contemplated hereby whether or not the transactions contemplated hereby are
consummated, except that (i) the Company shall pay the reasonable fees and
expenses for one legal counsel for the Purchasers and (ii) in the event that the
Closing does not occur through no fault of the Purchasers after execution of
this Agreement, the Company shall be responsible for the reasonable and
documented out of pocket expenses of the Purchasers.
SECTION 9.15 CONFIDENTIALITY. Each of the Purchasers, on the one hand,
and the Company, on the other hand, acknowledge and agree that any information
or data it has acquired from the other, not otherwise properly in the public
domain, was received in confidence. Each such party agrees not to divulge,
communicate or disclose, or use to the detriment of the disclosing party or for
the benefit of any other person or persons, or misuse in any way, any
confidential information of the disclosing party concerning the subject matter
hereof; PROVIDED that (i) the foregoing obligation with respect to the
disclosure and use of such information shall not apply to any information which
such party can demonstrate (A) was at the time of disclosure to such party or
thereafter, but prior to its disclosure by such party to any third party,
through no fault of such party, publicly available (other than as a result of
disclosure by such party), (B) has been disclosed to such party on a
non-confidential basis from a source other than any other party which, to such
party's knowledge, was not prohibited from disclosing such information to such
party by a legal, contractual, fiduciary or other obligation, (C) has been
independently developed by the such party without the violation of any of my
obligations under this Agreement or (D) is required to be disclosed by
applicable law (including, without limitation, the federal securities laws),
rule, regulation or regulatory body (including, without limitation, the National
Association of Insurance Commissioners) and (ii) such party may, if required by
subpoena or valid legal process, disclose any such information, but only to the
extent so required and only after using its best efforts to give the other party
or parties (as the case may be) prior notice of such required disclosure in
order to afford such party or parties an opportunity to obtain an injunction, a
protective order or other relief.
SECTION 9.16. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, and by different parties hereto on separate counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement or caused this Agreement to be executed by their duly authorized
representatives, as of the date first written above.
SUNPHARM CORPORATION
By: /s/ STEFAN BORG
-----------------------------------
Name: Stefan Borg
34
<PAGE>
Title: President
Counterpart Signature Pages Begin on Next Page
35
<PAGE>
COUNTERPART SIGNATURE PAGE FOR PURCHASERS
The undersigned hereby agrees to become a party to that certain
Securities Purchase Agreement dated as of March 31, 1999 (the "Agreement") among
SunPharm Corporation (the "Company") and others. From and after the
undersigned's execution and delivery and the Company's acceptance of this
Counterpart Signature Page, the undersigned shall be a party to the Agreement.
UNI-VEST
----------------------------------------
Printed Name of Purchaser
----------------------------------------
Signature of Purchaser
Total Investment Amount: $500,000.00
---------------
Number of shares of Series B Redeemable
Convertible Preferred Stock: 66,667
------------
Aggregate Purchase Price for shares of
Series B Redeemable Convertible
Stock: $4.00
---------------------------------
Number of shares of Common
Stock: 183,333
---------------------------------
Alternative a
-------------
Aggregate Purchase Price
for Shares of Common Stock: 1,273
------------
Alternative B
-------------
Number of 1997 Warrants Surrendered:
----------------------------------------
By: Claus Jorgensen
-----------------------------
Title: Managing Director
-----------------------------
Address: Nyropsgade 17
-----------------------------
1602 Copenhagen
-----------------------------
Denmark
-------
Date: March 31, 1999
---------------------------------
Agreed and accepted as to
66,667 shares of Series B Redeemable
- ------ Convertible Preferred Stock
183,333 shares of Common Stock
- -------
SUNPHARM CORPORATION
BY: /s/ STEFAN BORG
-----------------------------
Title: President
-------------------------
Date: March 31, 1999
-------------------------
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of Number of Number of Cash Portion of
Preferred Shares 1997 Warrants Common Shares Purchase Price
Purchaser Purchased At Closing Surrendered At Closing Purchased At Closing Paid At Closing
--------- -------------------- ---------------------- -------------------- ---------------
<S> <C> <C> <C>
Uni-Invest 66,667 183,333 $ 500,000
Niopsgade 17
Copenhagen V
DK 1602
TOTAL 66,667 183,333 $ 500,000
</TABLE>
EXHIBIT 11.1
SUNPHARM CORPORATION
CALCULATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
AND NET LOSS PER SHARE
<TABLE>
<CAPTION>
For three months ended March 31, 1999:
DAYS
TOTAL SHARES OUTSTANDING
------------- ---------------
<S> <C> <C> <C>
6,621,395 x 46 = 304,584,170
6,731,395 x 43 = 289,449,985
6,914,728 x 1 = 6,914,728
--------------- -----------
90 600,948,883
Weighted Average Shares = 600,948,883 / 90 = 6,677,210
Net Loss Per Share = $ (969,162)/ 6,677,210= $ (0.15)
For three months ended March 31,1998:
DAYS
TOTAL SHARES OUTSTANDING
------------- --------------
5,737,828 x 8 = 45,902,624
5,745,618 x 56 = 321,754,608
5,748,618 x 15 = 86,229,270
5,758,901 x 11 = 63,347,911
--------------- -----------
90 517,234,413
Weighted Average Shares = 517,234,413 / 90 = 5,747,049
Net Loss Per Share = $ (1,039,126)/ 5,747,049= $ (0.18)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000884888
<NAME> SunPharm Corporation
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,041,893
<SECURITIES> 348,293
<RECEIVABLES> 127,235
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,527,613
<PP&E> 75,019
<DEPRECIATION> 19,726
<TOTAL-ASSETS> 1,719,416
<CURRENT-LIABILITIES> 519,673
<BONDS> 0
0
367
<COMMON> 691
<OTHER-SE> 21,438,293
<TOTAL-LIABILITY-AND-EQUITY> 1,719,416
<SALES> 0
<TOTAL-REVENUES> 18,963
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 988,125
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (969,162)
<INCOME-TAX> 0
<INCOME-CONTINUING> (969,162)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (969,162)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> 0
</TABLE>
